On the design of optimal parametric insurance

Alexis Louaas (1) , Pierre Picard (2)

1 CREST - Centre de Recherche en Économie et Statistique
2 CREST-INSEE - Centre de Recherche en Economie et en Statistique

Under parametric insurance, the indemnity is a function of a publicly-observable parameter vector correlated with the loss incurred by the policyholder. The parameter vector yields a loss index, which is the best estimate of the loss, the basis risk being the random difference between the actual loss and the loss index. We show that the design of optimal parametric insurance depends on whether the parameter vector and the basis risk are independently distributed or not, and we analyze how it is affected by the attitude toward risk of the policyholder.

Keywords: insurance; parametric insurance; loss index; Risk aversion; prudence

Domains: Quantitative Finance [q-fin]

Alexis Louaas, Pierre Picard. On the design of optimal parametric insurance. 2024. ⟨hal-04511811⟩