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Insurance contract design based on the type of risk preference of the insured

  • School of Management, University of Science and Technology of China, Hefei 230026, China

Cite this:
https://doi.org/10.3969/j.issn.0253-2778.2016.08.010
  • Received Date: 22 December 2015
  • Accepted Date: 17 March 2016
  • Rev Recd Date: 17 March 2016
  • Publish Date: 30 August 2016
    Abstract

  • Abstract

    Empirical studies as questionnaire and models are combined. Risk preference parameters in prospect theory is used to describe the characteristics of the insured risk preference, insured are divided into three categories. In accordance with the characteristics of the insured risk preference by cluster analysis: loss risk rationality type, sensitive to loss probability type and sensitive to loss value type. Characteristics of the insured risk preference are analyzed based on statistical data analysis. Combined with performance-based insurance contracts, insurance contract framework consist of base premium and incentive premiums has been designed for different types of irrational risk preference insured. As for sensitive to loss probability type insured, they can get incentive premiums by setting deductibles. As for sensitive to loss value type insured, full insurance model change into co-insurance when loss beyond the agreed full insurance range. Finally, this type insurance contract can stimulate disaster prevention efforts from the insured, so as to achieve the objective of reducing the risk and reducing the probability of loss.

    Abstract

    Empirical studies as questionnaire and models are combined. Risk preference parameters in prospect theory is used to describe the characteristics of the insured risk preference, insured are divided into three categories. In accordance with the characteristics of the insured risk preference by cluster analysis: loss risk rationality type, sensitive to loss probability type and sensitive to loss value type. Characteristics of the insured risk preference are analyzed based on statistical data analysis. Combined with performance-based insurance contracts, insurance contract framework consist of base premium and incentive premiums has been designed for different types of irrational risk preference insured. As for sensitive to loss probability type insured, they can get incentive premiums by setting deductibles. As for sensitive to loss value type insured, full insurance model change into co-insurance when loss beyond the agreed full insurance range. Finally, this type insurance contract can stimulate disaster prevention efforts from the insured, so as to achieve the objective of reducing the risk and reducing the probability of loss.
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    • References(15)
  • [1]
    EECKHOUDT L, GOLLIER C, SCHLESINGER H. Changes in background risk and risk taking behavior[J]. Econometrica: Journal of the Econometric Society, 1996， 64（3）: 683-689.
    [2]
    GOLLIER C , PRATT J W. Risk vulnerability and the tempering effect of background risk[J]. Econometrica: Journal of the Econometric Society, 1996，64（5）: 1 109-1 123.
    [3]
    GUISO L, PAIELLA M. Risk aversion, wealth, and background risk[J]. Journal of the European Economic association, 2008, 6(6): 1 109-1 150.
    [4]
    EECKHOUDT L, GOLLIER C. The effects of changes in risk on risk taking: A survey[C]// Handbook of Insurance. New York: Springer, 2013: 123-134.
    [5]
    LUSK J L, COBLE K H. Risk perceptions, risk preference, and acceptance of risky food[J]. American Journal of Agricultural Economics, 2005, 87(2): 393-405.
    [6]
    OUTREVILLE J F. The relationship between insurance and economic development: 85 empirical papers for a review of the literature[J]. Risk Management and Insurance Review, 2013, 16(1): 71-122.
    [7]
    KAHNEMAN D, TVERSKY A. Prospect theory: An analysis of decision under risk [J]. Econometrica: Journal of the Econometric Society, 1979, 47(2): 263-291.
    [8]
    PRELEC D. The probability weighting function[J]. Econometrica, 1998，66(3): 497-528.
    [9]
    饶育蕾，张媛，刘晨. 区域文化差异对个人决策偏好影响的调查研究[J]. 统计与决策，2012(22): 93-98.
    RAO Yulei, ZHANG Yuan, LIU Chen. The research on the impact of regional culture difference on individual decision preference[J]. Statistic and Decision, 2012(22): 93-98.
    [10]
    TANAKA T, CAMERER C F, NGUYEN Q. Risk and time preferences: Linking experimental and household survey data from Vietnam[J]. The American Economic Review, 2010, 100(1): 557-571.
    [11]
    卡尔H博尔奇. 保险经济学[M]. 北京: 商务印书馆，1999.
    [12]
    EHRLICH I, BECKER G S. Market insurance, self-insurance, and self-protection[J]. The Journal of Political Economy, 1972, 80(4): 623-648.
    [13]
    吴秀君. 激励减灾的洪水保险契约设计[J]. 武汉大学学报: 工学版，2008, 41(2): 52-55.
    WU Xiujun. Flood insurance contact design based on incentive mitigation[J]. Engineering Journal of Wuhan University, 2008, 41(2):52-55.
    [14]
    杜江. 效用理论浅析及在保险中的应用[D]. 成都：西南财经大学，2008.
    DU Jiang. Utility theory analysis and application in insurance[D]. Chengdu: Southwestern University of Finance and Economics, 2008.
    [15]
    BENARTZI S. Myopic loss aversion and the equity premium puzzle[J]. General Information, 1995,110(1):73-92.
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    [1]
    EECKHOUDT L, GOLLIER C, SCHLESINGER H. Changes in background risk and risk taking behavior[J]. Econometrica: Journal of the Econometric Society, 1996， 64（3）: 683-689.
    [2]
    GOLLIER C , PRATT J W. Risk vulnerability and the tempering effect of background risk[J]. Econometrica: Journal of the Econometric Society, 1996，64（5）: 1 109-1 123.
    [3]
    GUISO L, PAIELLA M. Risk aversion, wealth, and background risk[J]. Journal of the European Economic association, 2008, 6(6): 1 109-1 150.
    [4]
    EECKHOUDT L, GOLLIER C. The effects of changes in risk on risk taking: A survey[C]// Handbook of Insurance. New York: Springer, 2013: 123-134.
    [5]
    LUSK J L, COBLE K H. Risk perceptions, risk preference, and acceptance of risky food[J]. American Journal of Agricultural Economics, 2005, 87(2): 393-405.
    [6]
    OUTREVILLE J F. The relationship between insurance and economic development: 85 empirical papers for a review of the literature[J]. Risk Management and Insurance Review, 2013, 16(1): 71-122.
    [7]
    KAHNEMAN D, TVERSKY A. Prospect theory: An analysis of decision under risk [J]. Econometrica: Journal of the Econometric Society, 1979, 47(2): 263-291.
    [8]
    PRELEC D. The probability weighting function[J]. Econometrica, 1998，66(3): 497-528.
    [9]
    饶育蕾，张媛，刘晨. 区域文化差异对个人决策偏好影响的调查研究[J]. 统计与决策，2012(22): 93-98.
    RAO Yulei, ZHANG Yuan, LIU Chen. The research on the impact of regional culture difference on individual decision preference[J]. Statistic and Decision, 2012(22): 93-98.
    [10]
    TANAKA T, CAMERER C F, NGUYEN Q. Risk and time preferences: Linking experimental and household survey data from Vietnam[J]. The American Economic Review, 2010, 100(1): 557-571.
    [11]
    卡尔H博尔奇. 保险经济学[M]. 北京: 商务印书馆，1999.
    [12]
    EHRLICH I, BECKER G S. Market insurance, self-insurance, and self-protection[J]. The Journal of Political Economy, 1972, 80(4): 623-648.
    [13]
    吴秀君. 激励减灾的洪水保险契约设计[J]. 武汉大学学报: 工学版，2008, 41(2): 52-55.
    WU Xiujun. Flood insurance contact design based on incentive mitigation[J]. Engineering Journal of Wuhan University, 2008, 41(2):52-55.
    [14]
    杜江. 效用理论浅析及在保险中的应用[D]. 成都：西南财经大学，2008.
    DU Jiang. Utility theory analysis and application in insurance[D]. Chengdu: Southwestern University of Finance and Economics, 2008.
    [15]
    BENARTZI S. Myopic loss aversion and the equity premium puzzle[J]. General Information, 1995,110(1):73-92.
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