Procedure of insurance

A Fair procedure in insurance

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Vito Fragnelli^{a, ,} and Maria Erminia Marina^{, b}

^a Dipartimento di Scienze e Tecnologie Avanzate, Università del Piemonte Orientale, Corso Borsalino 54, 15100, Alessandria, Italy

^b Dipartimento di Economia e Metodi Quantitativi, Università di Genova, Italy

Received 1 August 2001;

revised 1 March 2003;

accepted 23 April 2003. ;

Available online 27 August 2003.

Abstract

We consider a random variable R, representing a risk that has to be insured by n companies and which a premium φ is assigned to. How should they share the risk and the premium in order to be better off? Under suitable hypotheses, there exists an optimal decomposition of the risk. According to this division, we develop a procedure that results in an allocation of (φ,R) that is efficient, individually rational and envy-free.

Author Keywords: Co-insurance; Optimal cooperation; Fair division; Envy-freeness; Premium calculation

JEL classification codes: D63; G22