The Effect of Ambiguity Aversion on Insurance and Self-protection

Authors


  • We thank the editor and two referees for useful comments. We also thank seminar participants at the University of Technology Sydney, the University of Auckland, the NHH at Bergen and the World Risk and Insurance Economics Congress (25–29 July 2010 in Singapore). The research leading to these results has received funding from the European Research Council under the European Community's Seventh Framework Programme (FP7/2007–2013) Grant Agreement no. 230589 and from the Chair ‘Risk markets and value creation’ financed by SCOR at IDEI.

Abstract

In this article, we derive a set of simple conditions such that ambiguity aversion always raises the demand for self-insurance and the insurance coverage, but decreases the demand for self-protection. We also characterise the optimal insurance design under ambiguity aversion and exhibit a case in which the straight deductible contract is optimal as in the expected utility model.

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