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Insurance design and arson-type risks

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  • Jean-Gabriel Lauzier

Abstract

We design the insurance contract when the insurer faces arson-type risks. The optimal contract must be manipulation-proof. It is therefore continuous, it has a bounded slope, and it satisfies the no-sabotage condition when arson-type actions are free. Any contract that mixes a deductible, coinsurance and an upper limit is manipulation-proof. We also show that the ability to perform arson-type actions reduces the insured's welfare as less coverage is offered in equilibrium.

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  • Jean-Gabriel Lauzier, 2021. "Insurance design and arson-type risks," Papers 2112.06817, arXiv.org.
    • Handle: RePEc:arx:papers:2112.06817
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    References listed on IDEAS

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