Journal of Risk and Uncertainty

, Volume 45, Issue 1, pp 51–78 | Cite as

Single-year and multi-year insurance policies in a competitive market

  • Paul R. Kleindorfer
  • Howard Kunreuther
  • Chieh Ou-Yang
Article

Abstract

This paper examines the demand and supply of annual and multi-year insurance contracts with respect to protection against a catastrophic risk in a competitive market. Insurers who offer annual policies can cancel policies at the end of each year and change the premium in the following year. Multi-year insurance has a fixed annual price for each year and no cancellations are permitted at the end of any given year. Homeowners are identical with respect to their exposure to the hazard. Each homeowner determines whether or not to purchase an annual or multi-year contract so as to maximize her expected utility. The competitive equilibrium consists of a set of prices where homeowners who are not very risk averse decide to be uninsured. Other individuals demand either single-year or multi-year policies depending on their degree of risk aversion and the premiums charged by insurers for each type of policy.

Keywords

Insurance Multi-year policies Catastrophic risk Risk aversion 

JEL Classification

D80 G22 Q54 

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  • Paul R. Kleindorfer
    • 1
  • Howard Kunreuther
    • 2
  • Chieh Ou-Yang
    • 3
  1. 1.INSEADParisFrance
  2. 2.The Wharton SchoolUniversity of PennsylvaniaPhiladelphiaUSA
  3. 3.City University of Hong KongHong KongChina

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