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Uncertain indemnity and the demand for insurance

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Abstract

This paper considers the demand for insurance in a model with uncertain indemnity. Uncertain indemnity tends to increase the demand for insurance for precautionary reasons, but it also tends to decrease the demand due to the risk created by indemnity uncertainty. When the coefficient of relative prudence is not too large, uncertain indemnity reduces the demand for insurance and partial coverage is optimal even at actuarially fair premiums. In addition, insurance may be an inferior good or a normal good, depending on the behavior of absolute risk aversion and the magnitude of the coefficient of relative risk aversion.

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Authors and Affiliations

  1. Department of Economics, San Diego State University, 5500 Campanile Drive, San Diego, CA, 92182-4485, USA

    Kangoh Lee

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  1. Kangoh Lee
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Correspondence to Kangoh Lee.

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Lee, K. Uncertain indemnity and the demand for insurance. Theory Decis 73, 249–265 (2012). https://doi.org/10.1007/s11238-012-9316-5

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  • DOI: https://doi.org/10.1007/s11238-012-9316-5

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