Reinstatement or Insurance Payment in Corporate Fire Insurance

This article characterizes the optimal corporate fire insurance contract when the insured firm has private information about the economic value of the damaged assets. It is shown that the indemnity should be lower when the firm receives insurance money than in case of reinstatement, but there should...

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Bibliographic Details
Published in:The Journal of risk and insurance 2000-12, Vol.67 (4), p.507-526
Main Authors: Bourgeon, Jean-Marc, Picard, Pierre
Format: Article
Language:English
Subjects:
Arson
Business insurance
Contracts
Corporations
Crime insurance
Economic costs
Economic value
Economics and Finance
Fire damage
Fire insurance
Humanities and Social Sciences
Indemnity insurance
Insurance
Insurance coverage
Insurance policies
Insurance providers
Insurance settlements
Interpretation and construction
property values
reinstatement
Risk exposure
Studies
Underwriting
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Summary:This article characterizes the optimal corporate fire insurance contract when the insured firm has private information about the economic value of the damaged assets. It is shown that the indemnity should be lower when the firm receives insurance money than in case of reinstatement, but there should be partial coverage even when reinstatement is chosen. When a risk of arson exists, the insurer may only reimburse reinstatement costs. Finally, the optimal contractual arrangement specifies that, in order to discriminate among firms, the insurer may use a (randomly exercised) reinstatement option as a screening device.
ISSN:0022-4367
1539-6975
DOI:10.2307/253848