INCREASES IN RISK AND DEDUCTIBLE INSURANCE

This paper examines how mean-preserving transformations in the loss distribution affect the optimal level of deductibility in an insurance contract. If marginal utility is convex, increases in risk affecting losses only below the deductible are shown to lead to a reduction in coverage (higher deductible), which can be viewed as an increase in precautionary savings. On the other hand, a transformation that spreads losses more towards the tails of the distribution leads to an increase in coverage (lower deductible) whenever preferences exhibit nonincreasing absolute risk aversion. © 1991.