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Finding Pareto Optimal Insurance Contracts

Author

Listed:
  • Y.M. Ermoliev

    (IIASA, Laxenburg, Austria)

  • S.D. Flåm

    (Norwegian School of Economics and Business Administration, University of Bergen, e-mail: sjur.flaam@econ.uib.no)

Abstract

This paper deals with on-line computation—or step-wise learning—of Pareto optimal insurance contracts. Our approach tolerates that the loss distribution might be unknown, intractable, or not well specified. Thus we accommodate fairly inexperienced parties. Losses are here simulated or observed, one at a time, and they cause iterated revisions of the premium. The mechanical and global nature of probability calculus thereby yields to more tentative, myopic procedures, possibly closer to how humans operate or reason in face of risk. Sequential revisions may also reduce the expense of insurers' time and money in seeking sufficient statistics. Emphasized below is the remarkable simplicity and stability of the resulting adaptive procedures. Special attention goes to catastrophic risks, and to subsidized or competitive insurance. The Geneva Papers on Risk and Insurance Theory (2001) 26, 155–167. doi:10.1023/A:1014386615065

Suggested Citation

  • Y.M. Ermoliev & S.D. Flåm, 2001. "Finding Pareto Optimal Insurance Contracts," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 26(2), pages 155-167, September.
    • Handle: RePEc:pal:genrir:v:26:y:2001:i:2:p:155-167
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    Cited by:

    1. Ching-Ping Wang & Hung-Hsi Huang, 2012. "Optimal insurance contract and coverage levels under loss aversion utility preference," Quantitative Finance, Taylor & Francis Journals, vol. 12(10), pages 1615-1628, October.

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