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We examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci and Mukerji (2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion can reduce the optimal insurance coverage.

Codes JEL

D81 : Criteria for Decision-Making under Risk and Uncertainty
G22 : Insurance; Insurance Companies

Programmes de recherche

CHAIRE SCOR "Risque de marché et création de valeur"
CHAIRE SCOR "Risque de marché et création de valeur" : Attitude face au risque

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