City Research Online

Abstract

This paper provides a thorough study into the impact of excess verdicts on the insurance industry and further explores the optimal insurance strategy from the policyholder’s perspective, especially when the court awards compensation beyond the insurance coverage, i.e., excess verdicts. This is particularly prominent in wrongful death cases, where both financial and legal risks are considerable. We introduce a mathematical model that simplifies these complex interactions into manageable components, such as loss amount and legal stage, to better understand when insurers need to cover excesses over policy limits. Our approach uses Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) under the premium principle to transform this infinite dimensional challenge into a tractable optimization problem. Our study shows that optimal insurance contracts employ multiple layers of indemnity to accommodate different risk environments, resulting in optimal risk allocation between insurers and policyholders, minimizing legal costs, and ensuring fair coverage.

Publication Type:	Other (Preprint)
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
Departments:	Bayes Business School Bayes Business School > Actuarial Science & Insurance
SWORD Depositor:	Symplectic Administrator

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