The Economics of Optimal Insurance Design.

Summary This chapter provides a survey on optimal insurance when insurers and policyholders have symmetric information about the distribution of potential damages. Under general conditions on the policyholder risk aversion and on transaction costs, the optimal insurance contract contains full insurance of losses above a straight deductible. This is proven without assuming expected utility. The use of expected utility generates additional results, e.g., in the case of nonlinear transaction costs.