Optimal Insurance Design Under a Value-at-Risk Framework |
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| Authors: | Ching-Ping Wang David Shyu Hung-Hsi Huang |
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| Institution: | (1) Department of Finance, I-Shou University, No. 1, Section 1, Hsueh-Cheng Rd., Ta-Hsu Hsiang, Kaohsiung County, Taiwan;(2) Department of Finance, National Sun Yat-Sen University, No. 70, Lien-Hai Rd., Kaohsiung, Taiwan;(3) Department of Business Administration, Southern Taiwan University of Technology, No. 1, Nan-Tai Street, Yung-Kang, Taiwan |
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| Abstract: | This study designs an optimal insurance policy form endogenously, assuming the objective of the insured is to maximize expected
final wealth under the Value-at-Risk (VaR) constraint. The optimal insurance policy can be replicated using three options,
including a long call option with a small strike price, a short call option with a large strike price, and a short cash-or-nothing
call option. Additionally, this study also calculates the optimal insurance levels for these models when we restrict the indemnity
to be one of three common forms: a deductible policy, an upper-limit policy, or a policy with proportional coinsurance.
JEL Classification No: G22 |
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| Keywords: | value at risk optimal insurance deductible policy limit coinsurance |
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