Operations, Information and Decisions Papers

Document Type

Journal Article

Date of this Version

8-2012

Publication Source

Journal of Risk and Uncertainty

Volume

45

Issue

1

Start Page

51

Last Page

78

DOI

10.1007/s11166-012-9148-2

Abstract

This paper examines the demand and supply of annual and multi-year insurance contracts with respect to protection against a catastrophic risk in a competitive market. Insurers who offer annual policies can cancel policies at the end of each year and change the premium in the following year. Multi-year insurance has a fixed annual price for each year and no cancellations are permitted at the end of any given year. Homeowners are identical with respect to their exposure to the hazard. Each homeowner determines whether or not to purchase an annual or multi-year contract so as to maximize her expected utility. The competitive equilibrium consists of a set of prices where homeowners who are not very risk averse decide to be uninsured. Other individuals demand either single-year or multi-year policies depending on their degree of risk aversion and the premiums charged by insurers for each type of policy.

Copyright/Permission Statement

The final publication is available at Springer via http://dx.doi.org/10.1007/s11166-012-9148-2

Keywords

insurance, multi-year policies, catastrophic risk, risk aversion

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Date Posted: 27 November 2017

This document has been peer reviewed.