Risk-insurance parity

TL;DR

This paper introduces the concept of risk-insurance parity, linking risk aversion types to classes of insurance contracts, and provides characterizations of these relationships, including new intermediate notions of risk aversion.

Contribution

It generalizes existing results by characterizing risk aversion through insurance propensity and introduces two new intermediate risk aversion concepts.

Findings

Characterization of weak and strong risk aversion via insurance propensity

Full classification of insurance indemnity functions for different risk aversion types

Introduction of two new intermediate risk aversion notions

Abstract

Risk aversion and insurance are two prominent and interconnected concepts in economics and finance. To explore their fundamental connection, we introduce risk-insurance parity, which associates various classes of insurance contracts with different notions of risk aversion. We show that the classic notions -- both weak and strong -- of risk aversion can be characterized by propensity to different classes of insurance contracts, generalizing recent results on propensity to full, proportional, and deductible-limit contracts in the literature. We obtain full characterizations of the classes of insurance indemnity functions that correspond to weak and strong risk aversion. Risk-insurance parity allows us to define two new notions of risk aversion, between weak and strong, characterized by insurance propensity to deductible-only and limit-only contracts respectively.