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Limited Liability and the Demand for Coinsurance by Individuals and Corporations

Author

Listed:
  • Andrea Bergesio

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute)

  • Pablo Koch-Medina

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute)

  • Cosimo Munari

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute)

Abstract

Within the context of expected utility and in a discrete loss setting, we provide a complete account of the demand for insurance by strictly-risk averse agents and risk-neutral firms when they enjoy limited liability. When exposed to a bankrupting, binary loss and under actuarially fair prices, individuals and firms will either fully insure or not insure at all. The decision to insure will depend on whether the benefits the insuree derives from insurance after having compensated the damaged party are sufficiently attractive to justify the premium paid. When the loss is nonbinary, even when prices are actuarially fair, any amount of coinsurance can be optimal depending on the nature of the loss.

Suggested Citation

  • Andrea Bergesio & Pablo Koch-Medina & Cosimo Munari, 2021. "Limited Liability and the Demand for Coinsurance by Individuals and Corporations," Swiss Finance Institute Research Paper Series 21-57, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2157
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3849959
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    Cited by:

    1. Georges Dionne & Denise Desjardins, 2022. "A re‐examination of the US insurance market's capacity to pay catastrophe losses," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 25(4), pages 515-549, December.

    More about this item

    Keywords

    insurance; risk-averse agent; risk-neutral firm; franchise value; limited liability;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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