Fairness principles for insurance contracts in the presence of default risk

TL;DR

This paper applies cooperative game theory to design fair insurance contracts considering default risk, highlighting the importance of benefit participation to ensure fairness under equilibrium conditions.

Contribution

It introduces a novel approach using fuzzy coalitions to determine fair benefit participation in insurance contracts affected by default risk.

Findings

Benefit participation is essential for fairness in default-risk insurance contracts.

Fuzzy coalition analysis helps determine equitable benefit sharing.

Default risk influences the structure of fair insurance agreements.

Abstract

We use the theory of cooperative games for the design of fair insurance contracts. An insurance contract needs to specify the premium to be paid and a possible participation in the benefit (or surplus) of the company. It results from the analysis that when a contract is exposed to the default risk of the insurance company, ex-ante equilibrium considerations require a certain participation in the benefit of the company to be specified in the contracts. The fair benefit participation of agents appears as an outcome of a game involving the residual risks induced by the default possibility and using fuzzy coalitions.