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Optimal decisions for an insurance contract with experience rating

  • Economics of Risk
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Abstract

In this paper we consider the insurance of assets with experience rating in the framework of a discrete-time dynamic decision model. The goal of the risk-averse agent (insurance buyer) is to maximize the expected utility of wealth at the finite planning horizon. First, it has to be decided whether a contract should be bought or not. The contract gives the possibility to choose in each period between three alternatives: to buy insurance and to file a claim, to buy insurance and not to file a claim, to suspend insurance. For this case structural properties of the optimal strategy are obtained by means of dynamic programming. Especially, we present a condition for the experience rating scheme such that the decision to suspend insurance is irreversible during the planning period (stopping rule). In the final section we present some numerical experiences. Among others it will be shown that the optimal decision functions generally are not monotone with respect to the agent's claim history.

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Authors and Affiliations

  1. Abteilung für industrielle Informationsverarbeitung, Wirtschaftsuniversität Wien, Reithlegasse 16, A-1190, Wien, Austria

    Werner Jammernegg

  2. Lehrstuhl für Wirtschafts- und Sozialstatistik, Friedrich-Schiller-Universität Jena, Fürstengraben 11, D-07743, Jena, Germany

    Peter Kischka

Authors
  1. Werner Jammernegg
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  2. Peter Kischka
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Jammernegg, W., Kischka, P. Optimal decisions for an insurance contract with experience rating. Ann Oper Res 52, 85–96 (1994). https://doi.org/10.1007/BF02033184

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  • DOI: https://doi.org/10.1007/BF02033184

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