What does this research mean for the field?

In high-risk environments with realistic frictions such as binding premium budgets, parametric insurance can yield higher welfare for risk-averse individuals than traditional indemnity insurance. Novelty: ClaimNovelty.INCREMENTAL. Consensus alignment: ConsensusAlignment.NEUTRAL.

What question did this study set out to answer?

To determine whether parametric insurance outperforms traditional indemnity insurance when accounting for realistic market frictions such as fixed costs and binding budget constraints.

August 19, 2026Journal of Risk & InsuranceOpen Access

When indemnity insurance fails: Parametric coverage under binding budget and risk constraints

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Authors

BABenjamin Avanzi DFDebbie Kusch Falden MSMogens Steffensen

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Overview

Theoretical analysis demonstrates parametric insurance yields higher welfare than indemnity insurance under budget constraints, highlighting the rationale for parametric risk transfer in disaster...

Key Points

To determine whether parametric insurance outperforms traditional indemnity insurance when accounting for realistic market frictions such as fixed costs and binding budget constraints.
Evaluated excess-of-loss indemnity insurance against parametric insurance using a common mean-variance framework under identical expected utility assumptions.
Incorporated market frictions including fixed transaction costs, heterogeneous premium loadings, and binding premium budget constraints.
Parametric insurance delivers higher welfare for risk-averse individuals when realistic market frictions and binding budget constraints render traditional indemnity insurance impractical.
The welfare advantage of parametric contracts disappears entirely when both insurance options operate without budget or friction constraints, explaining the utility of hybrid insurance models.

Cite This Study

Avanzi et al. (2026) studied this question.

synapsesocial.com/papers/6a8562eb03308d306e2d5e1f https://doi.org/10.1111/jori.70070

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August 19, 2026Journal of Risk & InsuranceOpen Access

When indemnity insurance fails: Parametric coverage under binding budget and risk constraints

View Full Paper

Ask AI

Bookmark

Authors

BABenjamin Avanzi DFDebbie Kusch Falden MSMogens Steffensen

Discussion

Member takes

Overview

Theoretical analysis demonstrates parametric insurance yields higher welfare than indemnity insurance under budget constraints, highlighting the rationale for parametric risk transfer in disaster...

Key Points

To determine whether parametric insurance outperforms traditional indemnity insurance when accounting for realistic market frictions such as fixed costs and binding budget constraints.
Evaluated excess-of-loss indemnity insurance against parametric insurance using a common mean-variance framework under identical expected utility assumptions.
Incorporated market frictions including fixed transaction costs, heterogeneous premium loadings, and binding premium budget constraints.
Parametric insurance delivers higher welfare for risk-averse individuals when realistic market frictions and binding budget constraints render traditional indemnity insurance impractical.
The welfare advantage of parametric contracts disappears entirely when both insurance options operate without budget or friction constraints, explaining the utility of hybrid insurance models.

Cite This Study

Avanzi et al. (2026) studied this question.

synapsesocial.com/papers/6a8562eb03308d306e2d5e1f https://doi.org/10.1111/jori.70070

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