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Multiple Losses, EX ANTE Moral Hazard, and the Implications for Umbrella Policies

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  • Michael Breuer
Abstract
Under certain cost conditions the optimal insurance policy offers full coverage above a deductible, as Arrow and others have shown. However, many insurance policies currently provide coverage against several losses although the possibilities for the insured to affect the loss probabilities by several prevention activities (multiple moral hazard) are substantially different. This article shows that optimal contracts under multiple moral hazard generally call for complex reimbursement schedules. It also examines the conditions under which different types of risks can optimally be covered by a single insurance policy and argues that the case for umbrella policies under multiple moral hazard is limited in practice.

Suggested Citation

  • Michael Breuer, 2005. "Multiple Losses, EX ANTE Moral Hazard, and the Implications for Umbrella Policies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 525-538, December.
    • Handle: RePEc:bla:jrinsu:v:72:y:2005:i:4:p:525-538
    DOI: 10.1111/j.1539-6975.2005.00136.x
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    References listed on IDEAS

    as
    1. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," LIDAM Reprints CORE 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Gollier, Christian & Schlesinger, Harris, 1996. "Arrow's Theorem on the Optimality of Deductibles: A Stochastic Dominance Approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 359-363, February.
    3. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    4. Picard, Pierre, 2000. "On the Design of Optimal Insurance Policies under Manipulation of Audit Cost," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 1049-1071, November.
    5. repec:bla:scandj:v:97:y:1995:i:1:p:123-35 is not listed on IDEAS
    6. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    7. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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    Cited by:

    1. Hangsuck Lee & Minha Lee & Jimin Hong, 2024. "Optimal insurance for repetitive natural disasters under moral hazard," Journal of Economics, Springer, vol. 143(3), pages 247-277, December.
    2. Tim Lohse & Julio R. Robledo & Ulrich Schmidt, 2012. "Self‐Insurance and Self‐Protection as Public Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 57-76, March.
    3. Carole Bernard & Shaolin Ji & Weidong Tian, 2013. "An optimal insurance design problem under Knightian uncertainty," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 36(2), pages 99-124, November.
    4. Sverre Grepperud, 2015. "Optimal safety standards when accident prevention depends upon both firm and worker effort," European Journal of Law and Economics, Springer, vol. 39(3), pages 505-521, June.
    5. van Kleef, R.C. & van de Ven, W.P.M.M. & van Vliet, R.C.J.A., 2009. "Shifted deductibles for high risks: More effective in reducing moral hazard than traditional deductibles," Journal of Health Economics, Elsevier, vol. 28(1), pages 198-209, January.
    6. Laux, Christian, 2008. "Corporate insurance design with multiple risks and moral hazard," CFS Working Paper Series 2008/54, Center for Financial Studies (CFS).

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