Design and study of hybrid BI insurance contracts with interruption compensation, reward, and penalty under adverse selection

Abstract

AbstractAiming at the adverse selection problem in the BI insurance market under asymmetric information, this paper designs a hybrid BI insurance contract with interruption compensation, reward, and penalty based on the principal‐agent theory. It is found that regardless of the existence of two or more risk types in the BI insurance market, the hybrid BI insurance contract will be a strict Pareto improvement of the traditional partial insurance contract that is replicated twice. Meanwhile, we validate and extend the above conclusions through an arithmetic example, which provides more comprehensive theoretical support for insurance companies to design new BI insurance.