Journal article
Optimal insurance under maxmin expected utility
Finance and stochastics, Vol.27(2), pp.467-501
04/01/2023
DOI: 10.1007/s00780-023-00497-y
Abstract
We examine a problem of demand for insurance indemnification, when the insured is sensitive to ambiguity and behaves according to the maxmin expected utility model of Gilboa and Schmeidler (J. Math. Econ. 18:141-153, 1989), whereas the insurer is a (risk-averse or risk-neutral) expected-utility maximiser. We characterise optimal indemnity functions both with and without the customary ex ante no-sabotage requirement on feasible indemnities, and for both concave and linear utility functions for the two agents. This allows us to provide a unifying framework in which we examine the effects of the no-sabotage condition, of marginal utility of wealth, of belief heterogeneity, as well as of ambiguity (multiplicity of priors) on the structure of optimal indemnity functions. In particular, we show how a singularity in beliefs leads to an optimal indemnity function that involves full insurance on an event to which the insurer assigns zero probability, while the decision maker assigns a positive probability. We examine several illustrative examples, and we provide numerical studies for the case of a Wasserstein and a Renyi ambiguity set.
Details
- Title: Subtitle
- Optimal insurance under maxmin expected utility
- Creators
- Corina Birghila - Otto-von-Guericke-Universität MagdeburgTim J. J. Boonen - University of AmsterdamMario Ghossoub - University of Waterloo
- Resource Type
- Journal article
- Publication Details
- Finance and stochastics, Vol.27(2), pp.467-501
- DOI
- 10.1007/s00780-023-00497-y
- ISSN
- 0949-2984
- eISSN
- 1432-1122
- Publisher
- Springer Nature
- Number of pages
- 35
- Language
- English
- Date published
- 04/01/2023
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9985179850102771
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