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Wealth Effects on the Insured’s Optimal Loss Portfolio and Asset Portfolio
Journal of Insurance and Finance
2009, 20(3),
pp.3-39
Publisher : Korea Insurance Research Institute
Research Area : Business Management
Publisher : Korea Insurance Research Institute
Research Area : Business Management
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Since Mossin(1968), it has long been recognized that insurance is an inferior good within the decreasing absolute risk aversion. The purpose of this paper is to analyze, based on Mossin(1968), the wealth effects on insured’s optimal loss portfolio and asset portfolio, using a general expected utility maximization model. Our main results can be summarized as follows: In particular, if an utility function exhibits DARA, an increase in initial wealth reduces the optimal level of insurance and deteriorates the riskiness of loss portfolio, and so insured’s total risk-taking in the final asset portfolio would in fact increase. However, the certainty equivalent level as well as the mean value of asset portfolio is improved more than an increase in initial wealth due to the saving of insurance loading. The additional results for the case of CARA and IARA are also provided.
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