The Impact of Insurance on the Level of Optimal Loss Mitigation (ABSTRACT)
Kleffner, A., & Kelly, M.
published: 2001 | Research publication | Refereed Journals - Finance
Kleffner, A., & Kelly, M. (2001). "The Impact of Insurance on the Level of Optimal Loss Mitigation". Northwest Journal of Business and Economics, 29-41.
ABSTRACT: Insurance affects individuals’ incentives to reduce expected losses. This paper examines how the optimal level of loss mitigation varies under different insurance scenarios. Specifically, we examine the effect of non-risk-based and risk-based premia, as well as the effect of government disaster assistance on the incentive to mitigate. The results in this paper show that because utility maximizing owners prefer to purchase less than full insurance, 100% co-insurance results in policyholders being “over-insured”. Also, flat premia that do not provide a discount for investment in mitigation may result in less mitigation than risk-based premia. In addition, the presence of disaster assistance acts as a disincentive for people to purchase adequate insurance coverage and affects the incentive to mitigate if risk-based premiums are charged. These results can be readily applied to the policy discussion of federal natural disaster insurance, specifically the implications of natural disaster insurance subsidies and whether mitigation should be voluntary or mandatory.
Download the article at: http://www.ac.wwu.edu/~cebr/nwjframe.htm
revised Dec 14/01
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