TY - JOUR

T1 - The design of an optimal insurance contract for irreplaceable commodities

AU - Huang, Rachel J.

AU - Tzeng, Larry Y.

N1 - Funding Information:
∗The author acknowledge funding from National Science Council in Taiwan (NSC93-2416-H-130-020).

PY - 2006/7

Y1 - 2006/7

N2 - This paper discusses optimal insurance contract for irreplaceable commodities. To describe the dual impacts on individuals when a loss occurs to the insured irreplaceable commodities, we use a state-dependent and bivariate utility function, which includes both the monetary wealth and sentimental value as two arguments. We show that over (full, partial) insurance is optimal when a decrease in sentimental value will increase (not change, decrease, respectively) the marginal utility of monetary wealth. Moreover, a non-zero deductible exists even without administration costs. Furthermore, we demonstrate that a positive fixed reimbursement is optimal if (1) the premium is actuarially fair, (2) the monetary loss is a constant, and (3) the utility function is additively separable and the marginal utility of money is higher in the loss state than in the no-loss state. We also characterize comparative statics of fixed-reimbursement insurance under an additively separable preference assumption.

AB - This paper discusses optimal insurance contract for irreplaceable commodities. To describe the dual impacts on individuals when a loss occurs to the insured irreplaceable commodities, we use a state-dependent and bivariate utility function, which includes both the monetary wealth and sentimental value as two arguments. We show that over (full, partial) insurance is optimal when a decrease in sentimental value will increase (not change, decrease, respectively) the marginal utility of monetary wealth. Moreover, a non-zero deductible exists even without administration costs. Furthermore, we demonstrate that a positive fixed reimbursement is optimal if (1) the premium is actuarially fair, (2) the monetary loss is a constant, and (3) the utility function is additively separable and the marginal utility of money is higher in the loss state than in the no-loss state. We also characterize comparative statics of fixed-reimbursement insurance under an additively separable preference assumption.

KW - Deductible

KW - Fixed-reimbursement insurance

KW - Irreplaceable commodities

KW - Optimal insurance contract

UR - http://www.scopus.com/inward/record.url?scp=33750194804&partnerID=8YFLogxK

U2 - 10.1007/s10713-006-9464-z

DO - 10.1007/s10713-006-9464-z

M3 - 期刊論文

AN - SCOPUS:33750194804

SN - 1554-964X

VL - 31

SP - 11

EP - 21

JO - GENEVA Risk and Insurance Review

JF - GENEVA Risk and Insurance Review

IS - 1

ER -