2025/09/17 by Bergesio, Andrea, Koch Medina, Pablo, Munari, Cosimo
Decision Sciences · Economics, Econometrics and Finance · #330 Economics #Expected utility #Insurance #Insurance and Financial Risk Management #Limited liability #Optimal demand #Risk and Portfolio Optimization #Stochastic processes and financial applications
paper · doi:10.5167/uzh-279797
openalex publication_date 2025/09/17 · openalex created_date 2025/11/23 · openalex updated_date 2026/07/28
We study optimal demand for insurance in a classical expected utility setting where the insured party has limited liability and has access to three different types of progressively more restrictive contracts. At one end, with no restrictions on the indemnity schedule, it is optimal to fully insure certain losses while leaving others uninsured. At the other end, if indemnity schedules and retained losses are assumed to be increasing functions of the underlying loss, the optimal insurance policies are shown to be capped deductibles. For the intermediate case when the indemnity schedule is only an increasing function of the loss, we find that optimal contracts exhibit a richer structure beyond the capped policies suggested in earlier literature. Our study extends and provides a unifying perspective on the existing literature on optimal insurance under limited liability.