Accession Number : AD0786591

Title :   A Note on Optimal Insurance,


Personal Author(s) : Keeler,Emmett B.

Report Date : FEB 1974

Pagination or Media Count : 9

Abstract : In his essay on medical care, Arrow proves the following theorem. 'If an insurance company is willing to offer any insurance policy against loss desired by the buyer at a premium which depends only on the policy's actuarial value, the policy chosen by a risk-averting buyer will take the form of 100 percent coverage above a deductible'. The theorem has been interpreted to show that such a policy is optimal for the buyer, but this will often be false. It is shown here that if the true distribution of losses is known in advance, or (equivalently) if there is a large number of identical individuals covered by the insurance and the accounts can be settled at the end of the year, the optimal insurance scheme does not have a premium. Instead, the optimal contract makes payments in as well as payments out contingent on the losses of the buyer during the year.

Descriptors :   *Economic models, Risk, Costs, Distribution functions

Subject Categories : Economics and Cost Analysis

Distribution Statement : APPROVED FOR PUBLIC RELEASE