The Expected Utility Maximization Framework And The Demand and Supply For Retroactive Liability Insurance

Abstract

The paper uses the expected utility of wealth maximization principle to establish the economic boundaries under which a market for retroactive liability insurance will develop.  It is shown that the economic feasibility for the backdated insurance coverage is affected by the income tax rates, and the levels of risk aversion of the potential insurer and insured and by the time to settlement.  However, the potential insurer’s tax rate is more relevant than the other parameters.