Sometimes more, sometimes less: Prudence and the diversification of risky insurance coverage

We analyze the optimal coverage level for an unreliable insurance contract if a utility-maximizing policyholder can transfer intrinsic nonperformance risk to several co-insurers. Our discussion starts with demand model under default and introduction of multiple risk-sharing instrument called co-insurance policy. Subsequently, we examine interrelation between recovery rate level, utility policyholder, in limit. then consider monotonicity changing number co-insurers increasing correlation. proposed criteria indicate that policyholders’ preferences more or less are primarily determined by their degree prudence. conclude prudent policyholders likely accept costs any management measure intended provide hedge against rik contracts.