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Article: Behavioral optimal insurance

TitleBehavioral optimal insurance
Authors
KeywordsBehavioral Finance
Cumulative Prospect Theory
Generalized Insurance Layer
Non-Convex Optimization
Optimal Insurance
Issue Date2011
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ime
Citation
Insurance: Mathematics And Economics, 2011, v. 49 n. 3, p. 418-428 How to Cite?
AbstractThe present work studies the optimal insurance policy offered by an insurer adopting a proportional premium principle to an insured whose decision-making behavior is modeled by Kahneman and Tversky's Cumulative Prospect Theory with convex probability distortions. We show that, under a fixed premium rate, the optimal insurance policy is a generalized insurance layer (that is, either an insurance layer or a stop-loss insurance). This optimal insurance decision problem is resolved by first converting it into three different sub-problems similar to those in Jin and Zhou (2008); however, as we now demand a more regular optimal solution, a completely different approach has been developed to tackle them. When the premium is regarded as a decision variable and there is no risk loading, the optimal indemnity schedule in this form has no deductibles but a cap; further results also suggests that the deductible amount will be reduced if the risk loading is decreased. As a whole, our paper provides a theoretical explanation for the popularity of limited coverage insurance policies in the market as observed by many socio-economists, which serves as a mathematical bridge between behavioral finance and actuarial science. © 2011 Elsevier B.V.
Persistent Identifierhttp://hdl.handle.net/10722/156268
ISSN
2015 Impact Factor: 1.378
2015 SCImago Journal Rankings: 1.000
ISI Accession Number ID
Funding AgencyGrant Number
Hong Kong RGC GRF502909
Hong Kong Polytechnic UniversityAPC0D
G-YH96
Chinese University of Hong Kong2060422
University of Hong Kong200907176207
Funding Information:

We are grateful to Hans Gerber, the anonymous referees and many seminar and conference participants for their valuable comments and suggestions. The second author acknowledges financial support from The Hong Kong RGC GRF 502909, The Hong Kong Polytechnic University Internal Grant APC0D, and The Hong Kong Polytechnic University Collaborative Research Grant G-YH96, and The Chinese University of Hong Kong Direct Grant 2010/2011 Project ID: 2060422. The third author acknowledges the support from an internal grant of The University of Hong Kong of code 200907176207.

References

 

DC FieldValueLanguage
dc.contributor.authorSung, KCJen_US
dc.contributor.authorYam, SCPen_US
dc.contributor.authorYung, SPen_US
dc.contributor.authorZhou, JHen_US
dc.date.accessioned2012-08-08T08:41:06Z-
dc.date.available2012-08-08T08:41:06Z-
dc.date.issued2011en_US
dc.identifier.citationInsurance: Mathematics And Economics, 2011, v. 49 n. 3, p. 418-428en_US
dc.identifier.issn0167-6687en_US
dc.identifier.urihttp://hdl.handle.net/10722/156268-
dc.description.abstractThe present work studies the optimal insurance policy offered by an insurer adopting a proportional premium principle to an insured whose decision-making behavior is modeled by Kahneman and Tversky's Cumulative Prospect Theory with convex probability distortions. We show that, under a fixed premium rate, the optimal insurance policy is a generalized insurance layer (that is, either an insurance layer or a stop-loss insurance). This optimal insurance decision problem is resolved by first converting it into three different sub-problems similar to those in Jin and Zhou (2008); however, as we now demand a more regular optimal solution, a completely different approach has been developed to tackle them. When the premium is regarded as a decision variable and there is no risk loading, the optimal indemnity schedule in this form has no deductibles but a cap; further results also suggests that the deductible amount will be reduced if the risk loading is decreased. As a whole, our paper provides a theoretical explanation for the popularity of limited coverage insurance policies in the market as observed by many socio-economists, which serves as a mathematical bridge between behavioral finance and actuarial science. © 2011 Elsevier B.V.en_US
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/imeen_US
dc.relation.ispartofInsurance: Mathematics and Economicsen_US
dc.subjectBehavioral Financeen_US
dc.subjectCumulative Prospect Theoryen_US
dc.subjectGeneralized Insurance Layeren_US
dc.subjectNon-Convex Optimizationen_US
dc.subjectOptimal Insuranceen_US
dc.titleBehavioral optimal insuranceen_US
dc.typeArticleen_US
dc.identifier.emailYung, SP:spyung@hkucc.hku.hken_US
dc.identifier.authorityYung, SP=rp00838en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1016/j.insmatheco.2011.04.008en_US
dc.identifier.scopuseid_2-s2.0-79960996368en_US
dc.identifier.hkuros209522-
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-79960996368&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume49en_US
dc.identifier.issue3en_US
dc.identifier.spage418en_US
dc.identifier.epage428en_US
dc.identifier.isiWOS:000297832100014-
dc.publisher.placeNetherlandsen_US
dc.identifier.scopusauthoridSung, KCJ=54384307300en_US
dc.identifier.scopusauthoridYam, SCP=35112610600en_US
dc.identifier.scopusauthoridYung, SP=7006540951en_US
dc.identifier.scopusauthoridZhou, JH=45161858100en_US
dc.identifier.citeulike9359949-

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