Application Of The Utility Theory In The Insurance

The insurance industry is not only one of the three pillar industries of thefinancial sector in today’s society, also is a kind of the economic compensation modesin the modern society. Although the insurance plays an important role in promoting thesocial development and ensuring the people’s daily work and life, also can be calledthe stabilizer and the booster of social progress. However, the phenomenon ofinsurance fraud also is common along with the rapid development of the insuranceindustry. The insurance fraud not only exists in the primary insurance trading market,but also exists in the reinsurance trading market. The reason is information asymmetrybetween both sides in the market transaction. Information asymmetry is easy to causeadverse selection and moral hazard problems.The paper mainly studied reinsurance pricing and the insurer’s supervision cost inthe reinsurance transactions, by basing on the principle of utmost good faith in theinsurance law and using the related content of the utility theory, game theory and risktheory. First of all, it concluded the price of the optimal proportional reinsurance inperfect competition market under the condition of information symmetry and withoutmoral hazard; secondly, it concluded the price of the optimal excess of lossreinsurance in competition market under the condition of information symmetry or notand without moral hazard; thirdly, it concluded the optimal supervision cost of theinsurers to the insurants according to whether the insurers chose to buy reinsurance ornot along with moral hazard, mainly under the lack of solvency; finally, it concludedthe optimal supervision cost of the insurers according to whether the insurers chose tobuy reinsurance or not under the enough of solvency; finally, combing with the reality,some suggestions were put forward about strengthening moral level of the insurers.