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1 results

  • Insurance design and arson-type risks

  • Jean-Gabriel Lauzier
  • Journal:
    Annals of Actuarial Science , First View
    Published online by Cambridge University Press:
    26 November 2024, pp. 1-14
    • Article
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  • We design the insurance contract when the insurer faces arson-type risks. We show that the optimal contract must be manipulation-proof. Therefore, it is continuous, has a bounded slope, and satisfies the no-sabotage condition when arson-type actions are free. Any contract that mixes a deductible, coinsurance, and an upper limit is manipulation-proof. A key feature of our models is that we provide a simple, general, and entirely elementary proof of manipulation-proofness that is easily adapted to different settings. We also show that the ability to perform arson-type actions reduces the insured’s welfare as less coverage is offered in equilibrium.