Modul II

In this model, there are two states: loss and no loss. The insured chooses a level of coverage (α) to protect against loss at a premium (P). Both parties have full information about the loss distribution.

Fair insurance occurs when the premium equals the expected loss (q = 1), resulting in a 45° line between the insured’s wealth in both states (loss and no loss).

These curves represent the insured's preferences, showing combinations of wealth in both loss and no loss states that yield the same utility. They are downward sloping and convex.

Mossin's Theorem states that full insurance is optimal if and only if the premium is actuarially fair (q = 1).

In a monopoly, the insurer maximizes profits while ensuring the insured’s participation. The insured’s utility constraint is binding, and partial insurance may be optimal for the insurer’s profits.