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Handbook of Insurance pp 185–204Cite as

Prevention and Precaution

Abstract

This chapter surveys the economic literature on prevention and precaution. Prevention refers as either a self-protection activity—i.e. a reduction in the probability of a loss—or a self-insurance activity—i.e. a reduction of the loss. Precaution is defined as a prudent and temporary activity when the risk is imperfectly known. We first present results on prevention, including the effect of risk preferences, wealth and background risks. Second, we discuss how the concept of precaution is strongly linked to the effect of arrival of information over time in sequential models as well as to situations in which there is ambiguity over probability distributions.

Keywords

  • Utility Function
  • Risk Aversion
  • Market Insurance
  • Loss Probability
  • Ambiguity Aversion

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.

    See also Schlesinger and Venezian (1986) for an analysis of consumer welfare in a model considering both insurance and self-protection under various market settings.

  2. 2.

    Similar definitions have been given in international statements of policy including, e.g. the 1992 Convention on Climate Change, the 1992 Convention on Biological Diversity, the Maastricht Treaty in 1992/93 and the 2000 Cartagena Protocol on Biosafety. The PP has also been enacted in the national law of several countries, especially in Europe. In France for instance, the PP was included in 2005 in the French Constitution, that is at the highest juridical national level.

  3. 3.

    As an illustration, assume for instance b = 1, and that \(\tilde{\theta }\) takes values + 3 or − 3 with equal probability. In that case, the project has a positive expected value \(b + E_{\tilde{\theta }}\tilde{\theta } = 1\). But the point is that we have \(E\max (0,\tilde{\theta } ) = 1.5\) which is greater than 1.

  4. 4.

    We note that the economic literature has used different terms to define the notion of a better information. These terms include an earlier resolution of uncertainty (Epstein 1980), an increase in uncertainty (Jones and Ostroy 1984), arrival of information over time (Demers 1991), learning (Ulph and Ulph 1997) and a better information structure (Gollier et al. 2000).

  5. 5.

    Jones and Ostroy (1984) generalised Epstein’s theorem to non-differentiable problems and to a more general characterisation of adjustment costs.

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Acknowledgements

Nicolas Treich acknowledges financial support from the chair “Finance Durable et Investissement Responsable” (FDIR).

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Authors and Affiliations

  1. The Geneva Association, Geneva, Switzerland

    Christophe Courbage

  2. LSAF, ISFA, Université Lyon 1, Université de Lyon, Lyon, France

    Béatrice Rey

  3. LERNA-INRA, Toulouse School of Economics, Toulouse, France

    Nicolas Treich

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  1. Christophe Courbage
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  2. Béatrice Rey
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  3. Nicolas Treich
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Correspondence to Béatrice Rey .

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  1. Finance, HEC Montreal, Montreal, Québec, Canada

    Georges Dionne

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Courbage, C., Rey, B., Treich, N. (2013). Prevention and Precaution. In: Dionne, G. (eds) Handbook of Insurance. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0155-1_8

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