Deductible Insurance and Nonlinear Pricing

In this paper the problem of pricing deductible insurance is studied in the case where individuals are allowed to self-select their level of deductibility. The model uses a continuous state system allowing for both full and partial losses with a slight modification to include positive probabilities for the events "a full loss occurs" and "no loss occurs." These mass points in the density function are shown to be a determining factor in the choice of a policy by the consumer. In choosing an optimal policy the consumer decides how to allocate his initial wealth between consumption purchases, insurance purchases, and savings. This optimal choice depends directly upon the consumer's degree of risk aversion and his loss probabilities. Other things being equal, consumers who are either more risk averse, more prone to incur a loss or possess less initial wealth buy more insurance. Also the consumer's choice is dependent upon the set of available premiums. If a different set of premiums is made available the consumer will most likely alter his insurance purchases. The optimal contract under various premium schedules is determined. The conditions for choosing an optimal insurance contract yield self-selection properties which will be used by insurers in determining an optimal (expected profit maximizing) price.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Schlesinger, Harris

• Economics, Theory

Language dc:language

eng

Identifier

(UMI)AAI8026587

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/67669