The Demand for Insurance With an Upper Limit on Coverage

The Demand for Insurance With an Upper Limit on Coverage

The demand for insurance is examined when the indemnity schedule is subject to an upper limit. The optimal contract is shown to display full insurance above a deductible up to the cap. Some results derived in the standard model with no upper limit on coverage turn out to be invalid; the optimal dedu...

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Bibliographic Details
Published in:The Journal of risk and insurance Vol. 71; no. 2; pp. 253 - 264
Main Authors: Cummins, J. David, Mahul, Olivier
Format: Journal Article
Language:English
Published: 350 Main Street , Malden , MA 02148 , USA , and 9600 Garsington Road , Oxford OX4 2DQ , UK Blackwell Publishing 01-06-2004
The American Risk and Insurance Association
American Risk and Insurance Association, Inc
Blackwell Publishing Ltd
Wiley
Series:Journal of Risk & Insurance
Subjects:
Deductible coverage
Demand
Economics and Finance
Humanities and Social Sciences
Indemnity
Indemnity insurance
Insurance
Insurance claims
Insurance coverage
Insurance deductibles
Insurance policies
Insurance premiums
Insurance providers
Liability insurance
Mathematical models
Methods
Policyholders
Risk aversion
Statistical analysis
Supply and demand
United States
United States > US
insurance
assurance
sciences économiques
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Description
Summary:The demand for insurance is examined when the indemnity schedule is subject to an upper limit. The optimal contract is shown to display full insurance above a deductible up to the cap. Some results derived in the standard model with no upper limit on coverage turn out to be invalid; the optimal deductible of an actuarially fair policy is positive and insurance may be a normal good under decreasing absolute risk aversion. An increase in the upper limit would induce the policyholder with constant absolute risk aversion to reduce his or her optimal deductible and therefore this would increase the demand for insurance against small losses.
Bibliography:ArticleID:JORI088
istex:7E4B6899119A8B237771231AC404F0344D1859DF
ark:/67375/WNG-60192TD3-F
J. David Cummins works at the Wharton School, University of Pennsylvania. Olivier Mahul works with Financial Sector Operations and Policy Department, the World Bank. Research on this article was initiated while O. Mahul was visiting the Department of Insurance and Risk Management, the Wharton School, University of Pennsylvania. The authors wish to thank three anonymous referees for helpful comments.
ISSN:0022-4367
1539-6975
DOI:10.1111/j.0022-4367.2004.00088.x