Behavioral optimal insurance

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      <subfield code="a">Behavioral optimal insurance</subfield>
      <subfield code="c">K.C.J. Sung... [et al.]</subfield>
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      <subfield code="a">The present work studies the optimal insurance policy offered by an insurer adopting a proportional premium principice 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. </subfield>
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      <subfield code="a">Sung, K.C.J.</subfield>
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      <subfield code="t">Insurance : mathematics and economics</subfield>
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      <subfield code="g">01/11/2011 Tomo 49 Número 3  - 2011 , p. 418-428</subfield>
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