Optimal insurance design under mean-variance preference with narrow framing

Liang, Xiaoqing1; Jiang, Wenjun2; Zhang, Yiying3

2023-09-01

10.1016/j.insmatheco.2023.06.002

INSURANCE MATHEMATICS & ECONOMICS   影响因子和分区

0167-6687

1873-5959

In this paper, we study an optimal insurance design problem under mean-variance criterion by considering the local gain-loss utility of the net payoff of insurance, namely, narrow framing. We extend the existing results in the literature to the case where the decision maker has mean-variance preference with a constraint on the expected utility of the net payoff of insurance, where the premium is determined by the mean-variance premium principle. We first show the existence and uniqueness of the optimal solution to the main problem studied in the paper. We find that the optimal indemnity function involves a deductible provided that the safety loading imposed on the "mean part" of the premium principle is strictly positive. Our main result shows that narrow framing indeed reduces the demand for insurance. The explicit optimal indemnity functions are derived under two special local gain-loss utility functions - the quadratic utility function and the piecewise linear utility function. As a spin-off result, the Bowley solution is also derived for a Stackelberg game between the decision maker and the insurer under the quadratic local gain-loss utility function. Several numerical examples are presented to further analyze the effects of narrow framing on the optimal indemnity function as well as the interests of both parties.& COPY; 2023 Elsevier B.V. All rights reserved.

Narrow framing Mean-variance criterion Mean-variance premium principle Deductible Bowley solution

SCI ; SSCI

英语

通讯

National Natural Science Foundation of China["12101336","12271274"] ; Natural Sciences and Engineering Research Council of Canada[RGPIN-2020-04204] ; Guangdong Basic and Applied Basic Research Foundation[2023A1515011806]

Business & Economics ; Mathematics ; Mathematical Methods In Social Sciences

Economics ; Mathematics, Interdisciplinary Applications ; Social Sciences, Mathematical Methods ; Statistics & Probability

WOS:001036368200001

ELSEVIER

ECONOMICS BUSINESS

Web of Science

1.Hebei Univ Technol, Sch Sci, Tianjin 300401, Peoples R China
2.Univ Calgary, Dept Math & Stat, Calgary, AB T2N 1N4, Canada
3.Southern Univ Sci & Technol, Dept Math, Shenzhen 518055, Peoples R China

Liang, Xiaoqing,Jiang, Wenjun,Zhang, Yiying. Optimal insurance design under mean-variance preference with narrow framing[J]. INSURANCE MATHEMATICS & ECONOMICS,2023,112.

Liang, Xiaoqing,Jiang, Wenjun,&Zhang, Yiying.(2023).Optimal insurance design under mean-variance preference with narrow framing.INSURANCE MATHEMATICS & ECONOMICS,112.

Liang, Xiaoqing,et al."Optimal insurance design under mean-variance preference with narrow framing".INSURANCE MATHEMATICS & ECONOMICS 112(2023).