TITLE:
Optimal Insurance with Background Risk under the Ambiguity and Belief Heterogeneity Structure
AUTHORS:
Xiaohan Wang
KEYWORDS:
Optimal Insurance, Monotone Hazard Ratio Order, Smooth Ambiguity Model, Background Risk, Belief Heterogeneity Structure
JOURNAL NAME:
Journal of Applied Mathematics and Physics,
Vol.12 No.6,
June
24,
2024
ABSTRACT: In this paper, we discuss the optimal insurance in the presence of background risk while the insured is ambiguity averse and there exists belief heterogeneity between the insured and the insurer. We give the optimal insurance contract when maxing the insured’s expected utility of his/her remaining wealth under the smooth ambiguity model and the heterogeneous belief form satisfying the MHR condition. We calculate the insurance premium by using generalized Wang’s premium and also introduce a series of stochastic orders proposed by [1] to describe the relationships among the insurable risk, background risk and ambiguity parameter. We obtain the deductible insurance is the optimal insurance while they meet specific dependence structures.