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On insurance contract design for low probability events

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  • Eric Langlais

Abstract

This paper extends the analysis of insurance contracts design to the case of "low probability events", when there is a probability mass on the event "no accident-zero loss". The optimality of the deductible clause is discussed both at the theoretical and empirical levels.

Suggested Citation

  • Eric Langlais, 2008. "On insurance contract design for low probability events," EconomiX Working Papers 2008-33, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2008-33
    as

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    File URL: http://economix.fr/pdf/dt/2008/WP_EcoX_2008-33.pdf
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    References listed on IDEAS

    as
    1. Cummins, J David & Mahul, Olivier, 2003. "Optimal Insurance with Divergent Beliefs about Insurer Total Default Risk," Journal of Risk and Uncertainty, Springer, vol. 27(2), pages 121-138, October.
    2. Olivier Mahul & Brian Davern Wright, 2004. "Implications of incomplete performance for optimal insurance," Post-Print hal-01952109, HAL.
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    4. Christian Gollier & Harris Schlesinger, 1996. "Arrow's theorem on the optimality of deductibles: A stochastic dominance approach (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 359-363.
    5. Howard Kunreuther & Mark Pauly, 2004. "Neglecting Disaster: Why Don't People Insure Against Large Losses?," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 5-21, January.
    6. repec:dau:papers:123456789/5463 is not listed on IDEAS
    7. John David Cummins & Olivier Mahul, 2003. "Optimal insurance with divergent beliefs about total default risk," Post-Print hal-01952121, HAL.
    8. Olivier Mahul, 1999. "The design of an optimal area yield crop insurance contract," Post-Print hal-01952091, HAL.
    9. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    10. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    11. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
    12. G. Carlier & R.A. Dana & N. Shahidi, 2003. "Efficient Insurance Contracts under Epsilon-Contaminated Utilities," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 59-71, June.
    13. Eeckhoudt, L. & Gollier, C., 1996. "The Insurance of Low Probability Events," Papers 976.423, Toulouse - GREMAQ.
    14. Mahul, Olivier, 2000. "Optimal insurance design with random initial wealth," Economics Letters, Elsevier, vol. 69(3), pages 353-358, December.
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    16. Mark J. Machina, 1995. "Non-Expected Utility and The Robustness of the Classical Insurance Paradigm," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 20(1), pages 9-50, June.
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    More about this item

    Keywords

    Optimal insurance design; low probability events; insurance coverage for catastrophic risks;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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