Loss Modification Incentives for Insurers under Expected Utility and Loss Aversion

Arbeitspapier

Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an expected utility framework. We then use Köszegi and Rabin's (2006, 2007) loss aversion model to answer the same question for the case where consumers have reference-dependent preferences. Largely independent of the adopted framework, we find that the optimal loss probability is sizable and for many commonly used parameterizations much closer to 1/2 than to 0. Previous studies have argued that granting insurers market power may incentivize them to engage in loss prevention activities, this to the benefit of consumers. Our results show that one should be cautious in doing so because there are conceivable instances where the insurer's interests in modifying the loss probability to against those of consumers.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Tinbergen Institute Discussion Paper ; No. 14-111/VII

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Consumer Economics: Theory ; Market Structure, Pricing, and Design: Monopoly ; Criteria for Decision-Making under Risk and Uncertainty ; Monopoly; Monopolization Strategies
• Thema: loss modification ; expected utility ; reference-dependent preferences ; insurance

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Soetevent, Adriaan R. ; Zhou, Liting
• Ereignis: Veröffentlichung
• (wer): Tinbergen Institute
• (wo): Amsterdam and Rotterdam
• (wann): 2014

Weitere Informationen

• Handle: http://hdl.handle.net/10419/107828
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ