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Wa = initial wealthW1 = wealth without lossW2 = wealth with lossA: Initial situation (without insurance, without loss)

When you have full insurance, you are at point B on the certainty line. In case of fullinsurance:With loss, your wealth level is: Wa – L + (I – P(I))Without loss, your wealth level is: Wa – P(I)

The line passing through B and A is the fair premium line.

Now, if the Insurance Company decides to charge a proportional loading, then itdecreases the slope this fair premium line. Now the insurance offered is the red line. Withthe red line, the insurance buyer no longer buys full coverage. S/he will buy at point C where the indifference curve is tangent to the red line.

Now, if the Insurance Company instead charges a fixed loading, then it shifts the fair premium line. You lose Z in both states, so you go down by Z in both states in the same amount (see Zweifel Eisen page 85). Now the insurance offered is the purple line. Withthe purple line, the insurance buyer can choose between D and A (since the indifferencecurve goes through both D and A, and a person is indifferent between any points on theindifference curve). Hence, the insurance buyer can choose either full coverage or no

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coverage. The buyer is predicted to buy full coverage if he or she buys insurance at all.

If there is excessive fixed loading and the purple line moves very far back to the origin, so as to cause the indifference curve to not pass through A, then no coverage will bepurchased at all.

The maximum fixed loading that the buyer would be willing to pay for is hence the fixedloading at which point the Expected Utility with the fixed loading (at point D) is equal tothe EU without insurance (at point A).

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http://www.swica.ch/For‐private‐clients/Value‐for‐money/Optimizing‐basic‐insurance

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In no. 2, in other businesses services and products are marketed which trigger “must have” feelings in potential customers, insurances are abstract products and much more difficult to sell.

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In no. 2, in other businesses services and products are marketed which trigger “must have” feelings in potential customers, insurances are abstract products and much more difficult to sell.

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