Optimal Insurance Under Random Auditing |
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Authors: | Marie-Cécile Fagart and Pierre Picard |
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Institution: | (1) University of Rouen, THEMA and LEI, France;(2) THEMA (University of Paris X–Nanterre) and CEPREMAP, France |
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Abstract: | We provide a characterization of an optimal insurance contract (coverage schedule and audit policy) when the monitoring procedure is random. When the policyholder exhibits constant absolute risk aversion, the optimal contract involves a positive indemnity payment with a deductible when the magnitude of damages exceeds a threshold. In such a case, marginal damages are fully covered if the claim is verified. Otherwise, there is an additional deductible that disappears when the damages become infinitely large. Under decreasing absolute risk aversion, providing a positive indemnity payment for small claims with a nonmonotonic coverage schedule may be optimal. |
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Keywords: | insurance auditing risk aversion |
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