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- Title
The Design of an Optimal Insurance Policy: Note.
- Authors
Blazenko, George
- Abstract
This article presents information related to the design of an optimal insurance policy. In an article, economist Arthur Raviv examines Pareto optimal insurance policies when an insurer incurs settlement costs C induced by indemnity "I" for loss x. Raviv's main result is that a necessary and sufficient condition for the Pareto optimal deductible to equal zero is C' (I) =0. This implies that deductible policies give the best tradeoff between risk sharing and economizing on costly claim settlements. Since in practice these costs are significant, the theorem is of considerable importance. The theorem is correct, but Raviv's proof is not. In this note a corrected proof for the theorem is given. The corrected proof is important in itself because it allows for a generalization to a greater variety of transactions costs than has previously been considered. One section develops the setting for the problem and the notation to be subsequently used. Raviv's error and the corrected proof are presented in another section.
- Subjects
INSURANCE; INSURANCE policies; INSURANCE claims; INSURANCE premiums; INSURABLE risks; NONINSURABLE risks
- Publication
American Economic Review, 1985, Vol 75, Issue 1, p253
- ISSN
0002-8282
- Publication type
Article