• Journal of the Korea Academia-Industrial cooperation Society
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• v.3 no.4
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• pp.325-332
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• 2002

In the process of designing pareto optimal insurance contract, it is necessary to assume that insurance contract conditions are endogenous to build a model. The expected utility, the non-expected utility and the state-dependent utility function can be applied as a insurance decision making principle. The insurance costs may have the linear, convex, and concave ralationship with the indemnity schedule. However, the sunk cost and fixed cost must be recognized. The deductible which decides whether an insurance contract to be a full or partial insurance contract can exist in the forms of straight deductible or diminishing deductible. Indeciding the level of deductible, the types of the insurance and the risks to be insured should be the deciding factors. Especially for recall insurance, there is relatively high chance that the recalling company being bankrupt. Therefore, the possibility of bankrupcy should be the considering factor in deciding the policy limit. The existence of the incomplete market and uninsurable background risk should be understood as restricting conditions of the pareto-optimal insurance contract.