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Background Risk, Demand for Insurance, and Choquet Expected Utility Preferences

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  • Meglena Jeleva

    (Centre de Recherche en Economic et Statistique, Laboratoire d'Economic Industrielle, Paris and EUREQua, Université Paris 1 and C3E)

Abstract

This article deals with demand for insurance with a background risk in a nonprobabilized uncertainty framework, where preferences are represented by a nonadditive model of decision making. The Choquet expected utility model that we use generalizes expected utility and allows for a separation of the attitude towards uncertainty and the attitude towards wealth. When the insurable and the background risk are comonotone, the impact of the background risk on the demand for insurance is related to the attitude towards wealth. In contrast, when the two risks are anticomonotone, the attitude towards uncertainty is determinant. In this case, some of the resulting behaviors cannot be explained by the standard expected utility model. The Geneva Papers on Risk and Insurance Theory (2000) 25, 7–28. doi:10.1023/A:1008730106771

Suggested Citation

  • Meglena Jeleva, 2000. "Background Risk, Demand for Insurance, and Choquet Expected Utility Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 25(1), pages 7-28, June.
    • Handle: RePEc:pal:genrir:v:25:y:2000:i:1:p:7-28
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    Cited by:

    1. Amarante, Massimiliano & Ghossoub, Mario & Phelps, Edmund, 2015. "Ambiguity on the insurer’s side: The demand for insurance," Journal of Mathematical Economics, Elsevier, vol. 58(C), pages 61-78.
    2. Corina Birghila & Tim J. Boonen & Mario Ghossoub, 2023. "Optimal insurance under maxmin expected utility," Finance and Stochastics, Springer, vol. 27(2), pages 467-501, April.
    3. Massimiliano Amarante & Mario Ghossoub, 2016. "Optimal Insurance for a Minimal Expected Retention: The Case of an Ambiguity-Seeking Insurer," Risks, MDPI, vol. 4(1), pages 1-27, March.
    4. Corina Birghila & Tim J. Boonen & Mario Ghossoub, 2020. "Optimal Insurance under Maxmin Expected Utility," Papers 2010.07383, arXiv.org.
    5. Johanna Etner & Sandrine Spaeter, 2010. "The impact of ambiguity on health prevention and insurance," Working Papers of BETA 2010-08, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    6. Mario Ghossoub, 2016. "Optimal Insurance with Heterogeneous Beliefs and Disagreement about Zero-Probability Events," Risks, MDPI, vol. 4(3), pages 1-28, August.
    7. R. A. Aliev & W. Pedrycz & O. H. Huseynov, 2012. "Decision Theory With Imprecise Probabilities," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 271-306.
    8. Lu, Zhiyi & Meng, Shengwang & Liu, Leping & Han, Ziqi, 2018. "Optimal insurance design under background risk with dependence," Insurance: Mathematics and Economics, Elsevier, vol. 80(C), pages 15-28.
    9. Ghossoub, Mario, 2019. "Optimal insurance under rank-dependent expected utility," Insurance: Mathematics and Economics, Elsevier, vol. 87(C), pages 51-66.
    10. Stanislaw Heilpern, 2002. "Using Choquet integral in economics," Statistical Papers, Springer, vol. 43(1), pages 53-73, January.
    11. Lin, Wen-chang & Lu, Jin-ray, 2012. "Risky asset allocation and consumption rule in the presence of background risk and insurance markets," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 150-158.

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