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Efficient Single Limit Liability Insurance
Efficient Single Limit Liability Insurance
In a conventional liability insurance policy, the insurer pays a victim the lesser of (a) the damages assessed in a covered lawsuit and (b) a "per occurrence limit." If it were lawful to do so, you could write a modified liability insurance policy; however, in which the insurer would pay the victim the damages assessed in a covered lawsuit unless those damages exceeded some limit, in which event the insurer would pay the victim nothing and the insured would pay the insurer an additional special premium. This Demonstration examines premiums in a competitive market and the expected accident costs (premiums + monetized residual risk). The premiums are shown as dashed lines and the expected accident costs are shown as solid lines. As can be seen, the modified insurance policy will frequently be more advantageous to the insured, although it may be an unlawful insurance policy. The user can choose from among 10 different datasets regarding potential lawsuits and can select the wealth that the insured will be left with if it is bankrupted, any additional utility loss from having been bankrupted, the initial wealth of the insured, the probability that no lawsuit will be filed against the insured, the relative risk aversion of the insured, and the amount of any special premium for modified policies.