Possibilistic risk aversion and coinsurance

problem
Irina Georgescu
Academy of Economic Studies
Department of Economic Cybernetics
Piaţa Romana No 6 R 70167, Oficiul Postal 22, Bucharest, Romania and
ETEA–LOYOLA University, Department of Quantitative Methods,
C/ Escritor Castilla Aguayo
14004 Cordoba , Spain
Email: irina.georgescu@csie.ase.ro

Abstract
The coinsurance problem is an important topic in insurance decisions.
A risk–averse agent should choose a coinsurance rate maximizing the ex-
pected final wealth. In this paper we propose a possibilistic model of
coinsurance problem. A decision problem whose solution is the optimal
coinsurance is formulated. Some of its properties, the calculation modality
and its behaviour towards the changes of risk aversion are studied.

Keywords: possibilistic risk aversion, coinsurance rate, risk premium

1 Introduction
Risk phenomena are a part of most economic and financial activities. The
occurrence of such events has as consequence pecuniary losses. To retrieve a
part of these losses a risk averse agent closes insurance contracts. An insurance
contract assumes a premium P paid by a policyholder and a function I which
specifies in what way a part of losses is retrieved: I(x) indicates the amount
to be paid by the insurer to a loss x. The coinsurance policy is a frequently
met element in the insurance contracts. To a fixed premium, the insurer will
return a fixed ratio β off the loss. If x is the loss then the policyholder will get
I(x) = βx. The policyholder will choose a coinsurance rate β maximizing her
final wealth.
Traditionally risk is represented by random variables and its evaluation is
done by probabilistic indicators (expected value, variance, covariance, etc.). The
coinsurance problem is treated in the context of probabilistic risk theory. As
basic material we refer to monograph [11], pp. 45-61. The study of coinsur-

1
ance problem is tightly connected with the theory of risk aversion, developed
especially by Arrow [2], [3] and Pratt [21].
On the other hand Zadeh’s possibility theory [26] offers another way of ap-
proaching risk phenomena (see [5], [14], [15], [16]). In particular, in [14], [15]
two models of possibilistic risk aversion are proposed. In the framework of these
models risk situations are represented by fuzzy numbers, and the attitude of the
agent to the risk is represented by a usual utility function.
The study of coinsurance problem by possibilistic methods appears naturally.
This paper proposes a possibilistic model to determine the optimal coinsurance.
In this model the risk will be described by a fuzzy number and the decision
problem to choose the optimal coinsurance will be formulated in terms of pos-
sibilistic expected utility, a possibilistic concept which replaces the expected
utility from probabilistic risk theory.
The paper is organized as follows. In Section 2 the definition of fuzzy num-
ber, operations with fuzzy numbers and two associated possibilistic indicators,
posibilistic expected utility and possibilistic variance are presented.
In Section 3 we recall from [15], [16] the notion of possibilistic expected util-
ity (associated with a weighting function, a fuzzy number and a utility function)
and some of its properties. This notion is essential to formulate the decision
problem to determine the optimal coinsurance. Section 4 develops new elements
of the possibilistic risk aversion model treated in [15], [16]. In the setting of
the possibilistic model one defines a risk-averse, risk-lover or risk-neutral agent
(specified by her utility function). Then one proves that an agent is possibilistic
risk–averse iff her utility function is concave. This result together with a prob-
abilistic risk aversion characterization (Proposition 1.2 from [11], p.8 ) give a
surprising result: an agent is possibilistic risk-averse iff she is probabilistic risk-
averse. From [15] the notion of possibilistic risk premium and a possibilistic
Pratt–type theorem are recalled. Another result of the section gives a necessary
and sufficient condition such that the possibilistic risk premium to be decreasing
in wealth. Section 5 contains a possibilistic model of optimal coinsurance. In
this model the policyholder is represented by a utility function u, the loss is a
fuzzy number A and the final wealth is a fuzzy number g(A, β) depending on
the coinsurance rate β. Then the decision problem consists in finding that β
which realizes the possibilistic expected utility associated with the fuzzy number
g(A, β) and the utility function u. In this section it is proved that the optimal
coinsurance β ∗ can be computed as a solution of an equation and some of its
properties are studied. Among them we mention the possibilistic version of a
Mossin theorem from [20] and a theorem on β ∗ ’s behaviour towards the increase
or decrease of policyholder’s risk aversion.
In Section 6 an approximate calculation formula of optimal insurance rate in
terms of Arrow-Pratt index associated with the utility function, the possibilistic
expected utility and the possibilistic variance. The paper ends with conclusions.

2
2 Fuzzy numbers
In this section we recall the definition of fuzzy numbers [5], [8], [9] and some
possibilistic indicators associated with them [4], [6], [7].
Let X be a set of states. A fuzzy subset of X is a function A : X → [0, 1].
For any state x ∈ X the real number A(x) is the degree of membership of x to
A. The support of a fuzzy set A is supp(A) = {x ∈ X|A(x) > 0}. A fuzzy set
A is normal if there exists x ∈ X such that A(x) = 1.
In the following we consider X = R.
Let A be a fuzzy subset of R and γ ∈ [0, 1]. The γ–level set of A is defined
by 
γ {x ∈ R|A(x) ≥ γ} if γ > 0
[A] =
cl(supp(A)) if γ = 0
cl(supp(A)) is the topological closure of the set supp(A) ⊆ R.
A is called fuzzy convex if [A]γ is a convex subset of R for any γ ∈ [0, 1].
A fuzzy number is a fuzzy set of R normal, fuzzyconvex, continuous and with
bounded support.
Let A be a fuzzy number and γ ∈ [0, 1]. Then [A]γ is a closed and convex
subset of R. We denote a1 (γ) = min[A]γ and a2 (γ) = max[A]γ . Hence [A]γ =
[a1 (γ), a2 (γ)] for all γ ∈ [0, 1].
Let A, B be two fuzzy numbers and λ ∈ R. We define the functions A + B :
R → [0, 1] and λA : R → [0, 1] by
(A + B)(z) = sup{A(x) ∧ B(y)|x + y = z}
(λA)(z) = sup{A(x)|λx = z}
Then A + B and λA are fuzzy numbers.
If A1 , . . . , An are fuzzy numbers and λ1 , . . . , λn ∈ R then one can consider
Xn
the fuzzy number λ i Ai .
i=1
A non–negative and monotone increasing function f : [0, 1] → R is a weight-
R1
ing function if it satisfies the normality condition 0 f (γ)dγ = 1.
We fix a fuzzy number A and a weighting function f . Assume that [A]γ =
[a1 (γ), a2 (γ)] for all γ ∈ [0, 1].
The f –weighted
R 1 possibilistic expected value of A is defined by
E(f, A) = 12 0 (a1 (γ) + a2 (γ))f (γ)dγ.
The f –weightedR possibilistic variance of A is defined by
1
V ar(f, A) = 21 0 [(a1 (γ) − E(f, A))2 + (a2 (γ) − E(f, A))2 ]f (γ)dγ.
Assume now that A, B are two fuzzy numbers such that [A]γ = [a1 (γ), a2 (γ)]
and [B]γ = [b1 (γ), b2 (γ)] for any γ ∈ [0, 1]. The f –weighted possibilistic covari-
ance of A and B is definedR1 by
Cov(f, A, B) = 21 0 [(a1 (γ)−E(f, A))(b1 (γ)−E(f, B))+(a2 (γ)−E(f, A))(b2 (γ)−
E(f, B))]f (γ)dγ.
In the following when we write E(f, A), V ar(f, A) and Cov(f, A, B), the
weighting function f will be apriori fixed.

Proposition 2.1 [1], [12] Let A1 , . . . , An be fuzzy numbers and λ1 , . . . , λn ∈ R.

3
 n
X n
X
(i) E(f, λ i Ai ) = λi E(f, Ai )
i=1 i=1
n
X n
X
(ii) If λ1 , . . . , λn ≥ 0 then V ar(f, λ i Ai ) = λk λl Cov(f, Ak , Al )
i=1 k,l=1

3 Possibilistic expected utility

In this section we present the definition of possibilistic expected utility, some of
its properties and some examples.
We fix a weighting function f : [0, 1] → R and a fuzzy number A. Assume
that for any γ ∈ [0, 1], the γ–level set of A is [A]γ = [a1 (γ), a2 (γ)].
We consider a utility function with the class C 2 . Sometimes the domain of
a utility function can be [0, ∞) or an interval [0, M ].

Definition 3.1 [15] The possibilistic expected utility E(f, u(A)) associated with
f, A and u is defined
R 1 by
E(f, u(A)) = 21 0 [u(a1 (γ)) + u(a2 (γ))]f (γ)dγ.

Remark 3.2 (i) If u is the identity function then E(f, u(A)) = E(f, A).
(ii) If u(x) = (x − E(f, A))2 for all x ∈ R then E(f, u(A)) = V ar(f, A).
(iii) If λ ∈ R and u(x) = λ for all x ∈ R then E(f, u(A)) = λ.

Proposition 3.3 [15] Let g : R → R and h : R → R be two utility functions

and a, b ∈ R. We consider the utility function u = ag + bh. Then E(f, u(A)) =
aE(f, g(A)) + bE(f, h(A)).

Proposition 3.4 [15] Let g : R → R and h : R → R be two utility functions.

If g(x) ≤ h(x) for any x ∈ R then E(f, g(A)) ≤ E(f, h(A)).

Corollary 3.5 Let g : R → R be a utility function.

(i) If g ≥ 0 then E(f, g(A)) ≥ 0.
(ii) If g ≤ 0 then E(f, g(A)) ≤ 0.

Example 3.6 Assume that

(a) The weighting function f has the form f (γ) = 2γ for any γ ∈ [0, 1].
(b) A is the triangular fuzzy nuber A = (a, α, β).
(c) The utility function u has the form u(x) = −e−x for any x ∈ R.
Then a1 (γ) = a − (1 − (γ))α and a2 (γ) = a + (1 − (γ))β for any γ ∈ [0, 1].
Applying Definition
R 1 3.1 we obtain R1
E(f, u(A)) = 0 [u(a1 (γ))+u(a2 (γ))]γdγ = 0 [−e−a+(1−γ)α −e−a+(1−γ)β ]γdγ =
R1 R1
e−a+α 0 −e−γα γdγ + e−a−β 0 −eγβ γdγ.
Integrating
R 1 −γα by parts one obtains:
1 −α
−e γdγ = α e + α12 (e−α − 1)
R01 γβ
0
−e γdγ = − β1 eβ + β12 (eβ − 1)
therefore
E(f, u(A)) = e−a [ α1 − β1 + α12 (1 − eα ) + β12 (1 − e−β )].

4
4 Definition and characterization of possibilistic
risk aversion
In this section we define what a possibilistic risk averse, risk-lover and risk-
neutral agent means. We prove that these three notions are characterized by
a concave, convex or linear utility function. We introduce the notion of possi-
bilistic risk premium (in a slightly modified form from [15]) and we recall from
[15] a possibilistic Pratt theorem. We prove that the possibilistic risk premium
is decreasing in wealth iff the degree of absolute prudence ([11], p. 17) is larger
than the absolute risk aversion.
We consider an agent faced with a risk situation (e.g. a financial situation).
The agent will be represented by a utility function of class C 2 . The risk situation
can be probabilistically described by a random variable X or possibilistically by
a fuzzy number A.
Assume first that the risk is described by the random variable X and we
denote its expected value by M (X). Then u(X) is a random variable and its
expected value M u(X) is called probabilistic expected utility associated with
X and u.
By [11], p. 7 we assume that the agent u is probabilistic risk-averse if for any
wealth level w and any random variable X the inequality M u(w + X) ≤ u(w +
M (X)) holds. If the converse inequality holds then the agent is probabilistic
risk lover and in case of equality she will be probabilistic risk neutral .
We define now similar notions when the risk is described by a fuzzy number
A. We fix a weighting function f : [0, 1] → R.

Definition 4.1 An agent u is possibilistic risk-averse if for any wealth level w

and for any fuzzy number A the inequality holds:
(1) E(f, u(w + A)) ≤ u(w + E(f, A)).

When the converse inequality holds we say that the agent is possibilistic risk
lover and if (1) is an equality we say that u is possibilistic risk neutral .

Lemma 4.2 Given an agent u, the following assertions are equivalent:

(a) u is risk averse
(b) For any wealth level w and for any fuzzy number B with E(f, B) = 0 the
following inequality holds:
(2) E(f, u(w + B)) ≤ u(w).

Proof. (a) ⇒ (b) Obvious.

(b) ⇒ (a) Denoting B = A − E(f, A), we have E(f, B) = 0. Applying (2)
for B and w + E(f, A) instead of w it follows
E(f, u(w + A)) = E(f, u(w + E(f, A) + B)) ≤ u(w + E(f, A)).

Proposition 4.3 Consider an agent with the utility function u. Then the agent
is possibilistic risk averse off u is concave.

5
Proof. Assume first that u is concave. Let A be an arbitrary fuzzy number.
We consider the second order Taylor expansion of u(w +x) around w +m, where
m = E(f, A):
(3) u(w + x) = u(w + m) + u0 (w + m)(x − m) + 12 u00 (ξ(x))(x − m)2
where the real number ξ(x) is situated between x and m.
Applying Proposition 3.3 it follows
E(f, u(w+A)) = u(w+m)+u0 (w+m)E(f, A−m)+ 21 E(f, u00 (ξ(A))(A−m)2 ).
Since E(f, A − m) = E(f, A) − m = 0 one obtains
(4) E(f, u(w + A)) = u(w + m) + 21 E(f, u00 (ξ(A))(A − m)2 ).
Let the function g(x) = u00 (ξ(x))(x − m)2 for any x ∈ R. Since u is concave,
00
u (ξ(x)) ≤ 0, therefore g(x) ≤ 0 for any x ∈ R. By Corollary 3.5 (ii) it follows
E(f, u00 (ξ(A))(A − m)2 ) = E(f, g(A)) ≤ 0.
Then by (4) E(f, u(w + A)) ≤ u(w + E(f, A)) for any w, thus the agent
represented by u is possibilistic risk-averse.
To prove the converse assertion, assume that u is not concave. Then there
exists a wealth level w ∈ R and an interval I = [w −δ, w +δ] such that u00 (x) > 0
for any x ∈ I.
We take a fuzzy number A such that supp(A) = [a1 (γ), a2 (γ)].
We consider the function g(x) = u00 (ξ(x))(x − m)2 for any x ∈ R (associated
with the Taylor expansion (3)). Then, by Definition 3.1
R1
(5) E(f, g(A)) = 21 0 [(a1 (γ)−m)2 u00 (a1 (γ))+(a2 (γ)−m)2 u00 (a2 (γ))]f (γ)dγ.
But a1 (0) ≤ a1 (γ) ≤ a2 (0), a1 (0) ≤ a2 (γ) ≤ a2 (0), therefore a1 (γ), a2 (γ) ∈ I
for any γ ∈ [0, 1]. By hypothesis, u00 (a1 (γ)) > 0 and u00 (a2 (γ)) > 0 for any
γ ∈ [0, 1]. By (3) E(f, g(A)) > 0.
(4) can be written E(f, u(w + A)) = u(w + m) + 21 E(f, g(A)) therefore
E(f, u(w + A)) > u(w + m), which shows that the agent u is not possibilistic
risk–averse.

Remark 4.4 From Proposition 4.3 it follows that an agent u is possibilistic

risk–lover iff u is convex and u is possibilistic risk–neutral iff u is linear.

By Proposition 1.2 of [11] an agent represented by u is probabilistic risk

averse iff u is concave. From this equivalence and Proposition 4.3 the following
surprising result is obtained:

Proposition 4.5 Consider an agent with the utility function u. The following
are equivalent:
(i) u is probabilistic risk averse
(ii) u is possibilistic risk averse.

By Proposition 4.5 we will use the notion of risk–averse agent instead of

probabilistic risk–averse or possibilistic risk–averse.
The notion of possibilistic risk premium introduced in [15] is an important
indicator of possibilistic risk aversion. We present next a slightly modified notion
of possibilistic risk version compared to the one from [15].

6
Definition 4.6 Let A be a fuzzy number such that E(f, A) = 0, a strictly
monotonous utility function u of class C 2 and an initial wealth w. The possi-
bilistic risk premium π(w) = π(w, A, u) associated with w, A and u is defined
by:
(6) E(f, u(w + A)) = u(w − π(w))

Since u is strictly monotonous, there is a unique number π(w) verifying (6).

Definition 4.7 [1], [21] The Arrow–Pratt index of a utility function u is defined
by
00
(7) ru (w) = − uu0 (w)
(w)
for any w ∈ R.

We consider two agents with the strictly concave and strictly increasing
utility functions u1 , u2 of class C 2 . Let r1 (w) = ru1 (w) and r2 (w) = ru2 (w) be
the Arrow–Pratt indexes of u1 and u2 .
We recall from [15] the following possibilistic version of Pratt theorem [21]:

Proposition 4.8 The following assertions are equivalent:

(i) r1 (w) ≥ r2 (w) for any w ∈ R
(ii) u1 is more concave than u2 : there exists a function φ : R → R with
φ0 > 0 and φ00 < 0 such that u2 (w) = φ(u1 (w)) for any w ∈ R
(iii) π(w, A, u1 ) ≥ π(w, A, u2 ) for any w ∈ R and for any fuzzy number A
with E(f, A) = 0.

If the equivalent assertions of Proposition 4.8 are fulfilled, we say than u1 is

more risk averse than u2 .
Let u be a utility function of class C 2 such that u0 > 0, u00 < 0 and u000 > 0.
Then the utility function v = −u0 has the class C 2 and v 0 > 0, v 00 < 0. It follows
that u and v are utility functions verifying the conditions in which Proposition
4.8 can be applied.

Proposition 4.9 The following assertions are equivalent:

(i) For any fuzzy number A with E(f, A) = 0, the possibilistic risk premium
π(w, A, u) is decreasing in wealth: w1 ≤ w2 implies π(w2 , A, u) ≤ π(w1 , A, u).
(ii) v is more concave than u.

Proof. Let A be a fuzzy number with E(f, A) = 0. Assume that the level sets
of A have the form [A]γ = [a1 (γ), a2 (γ)] for γ ∈ [0, 1]. By Definition 4.6 we have
u(w − π(w, A, u)) = E(f, u(w + A))
R1
= 21 0 [u(w + a1 (γ)) + u(w + a2 (γ))]f (γ)dγ.
Deriving with respect to w and by Definition 4.6 applied to w it follows:
1 1 0
(1−π (w, A, u))u (w−π(w, A, u)) = 2 0 [u (w+a1 (γ))+u0 (w+a2 (γ))]f (γ)dγ
0 0
R
R1
= − 21 0 [v(w + a1 (γ)) + v(w + a2 (γ))]f (γ)dγ
= −E(f, v(w + A))
= −v(w − π(w, A, v))
From here we get

7
 u0 (w−π(w,A,u))+v(w−π(w,A,v))
π 0 (w, A, u) = u0 (w−π(w,A,u))
= v(w−π(w,A,v))−v(w−π(w,A,u))
u0 (w−π(w,A,u))
Since u0 (w − π(w, A, u)) > 0, the following assertions are equivalent:
• π(w, A, u) is decreasing in w
• For all w, π 0 (w, A, u) ≤ 0
• For all w, v(w − π(w, A, v)) ≤ v(w − π(w, A, u))
• For all w, π(w, A, v) ≥ π(w, A, u).
The equivalence of the last two assertions follows from the fact that v is
strictly increasing. Taking into account this and Proposition 4.8 the equivalence
of conditions (i) and (ii) follows.

Definition 4.10 [11] The Arrow–Pratt index of the utility function v = −u0 :
000
Pu (w) = rv (w) = − uu00 (w)
(w)

is called the degree of absolute prudence of the agent with the utility function
u.

By Proposition 4.8, v is more concave than u iff rv (w) ≥ ru (w) for all w.
Then condition (ii) of Proposition 4.9 says that the prudence is larger than the
absolute risk aversion.

5 Optimal coinsurance: a possibilistic approach

In this section we will present a possibilistic model for the insurance decision
problem. We will study the notion of coinsurance rate, its optimal value calcu-
lation and the way it varies with the risk aversion.
We consider a risk averse agent with a utility function u. The agent has an
initial wealth w0 subject to risk. The risk can be probabilistically modeled by
a random variable X or possibilistically by a fuzzy number A.
The agent wants to close an insurance contract to be able to retrieve a part
of the lost sum as the result of the risk phenomenon occurrence. By [11], p.46
an insurance contract assumes two components:
• a premium P to be paid by the policyholder
• an indemnity schedule I(x): the amount to be paid by the insurer for a
loss of size x
I(.) will be considered a utility function. The form of P depends on the
probabilistic or possibilistic approach of the insurance problem. If the risk is
described by the random variable X ≥ 0 then the mean sum retrieved by the
agent will be the probabilistic expected utility M I(X) and P will be defined in
terms of this indicator.
Next we assume that the risk is represented by a fuzzy number A whose level
sets are [A]γ = [a1 (γ), a2 (γ)] for γ ∈ [0, 1]. We assume that supp(A) ⊆ R+ and
supp(A) does not have only one element (A is not a fuzzy point).
We fix a weighting function f : [0, 1] → R.

8
 We consider the possibilistic expected utility E(f, I(A)) associated with f ,
A and I: R1
(1) E(f, I(A)) = 12 0 [I(a1 (γ)) + I(a2 (γ))]f (γ)dγ
In our possibilistic model, E(f, I(A)) will be the mean sum retrieved by the
agent through the insurance contract.
The possibilistic premium for insurance indemnity will have the form
(2) P = (1 + λ)E(f, I(A))
where λ is a loading factor.
The notion introduced by (2) is the possibilistic analogous of (probabilistic)
premium for insurance indemnity (see e.g. [11], pp. 49-50): E(f, I(A)) replaces
the probabilistic actuarial value of [11].
We consider the particular case when the function I(.) has the form I(x) =
βx for all x. By [11], p. 49, β is called coinsurance rate and 1 − β is called
retention rate.
In the particular case I(x) = βx a simple calculation shows that E(f, I(A)) =
βE(f, A), therefore the possibilistic premium for insurance indemnity will have
the form
(3) P (β) = (1 + λ)E(f, I(A)) = β(1 + λ)E(f, A)
Denoting by P0 = (1 + λ)E(f, A) the full possibilistic insurance premium,
(3) is written
(4) P (β) = βP0
The coinsurance rate is apriori chosen by the policyholder.
We consider the function g defined as
(5) g(x, β) = w0 − βP0 − (1 − β)x for all x and β.
The fuzzy number g(A, β) = w0 − βP0 − (1 − β)A represents the final wealth
of the policyholder with loss A and coinsurance rate β.
We recall that the utility function u has the class C 2 . The agent being
risk–averse, the function u will be concave (by Proposition 4.3).
Next we use also the function
(6) h(x, β) = u(g(x, β)) = u(w0 − βP0 − (1 − β)x)
We consider the possibilistic
R 1 expected utility associated with f , A and h:
H(β) = E(f, h(A, β)) = 21 0 [h(a1 (γ), β) + h(a2 (γ), β)]f (γ)dγ
therefore by (6)
R1
(7) H(β) = 21 0 [u(g(a1 (γ), β)) + u(g(a2 (γ), β))]f (γ)dγ
The decision problem of the policyholder is to find out a coinsurance rate
maximizing the possibilistic expected utility H(β) of final wealth g(A, β). Then
the optimal coinsurance rate β ∗ will verify
(8) H(β ∗ ) = max H(β)
β
(8) is an optimization problem expressed in terms of possibility theory: the
coinsurance rate β ∗ insures the maximum of possibilistic expected utility of final
wealth. (8) is the analogous of an optimization problem of the probabilistic
model of coinsurance problem (see problem (3.3) from [11], p. 50).
The optimal coinsurance rate of (8) is in general different from the coinsur-
ance rate of the optimization problem studied in [11].

9
Proposition 5.1 (i) The function H defined by (7) is concave.
(ii) The necessary and sufficient condition for the real number β ∗ to be the
optimal solution of the decision problem (8) is H 0 (β ∗ ) = 0.

Proof. (i) We compute the first derivative of H

R1
H 0 (β) = 12 0 [u0 (g(a1 (γ), β)) ∂g(a∂β
1 (γ),β)
+ u0 (g(a2 (γ), β)) ∂g(a∂β
2 (γ),β)
]f (γ)dγ
Taking into account the form (5) of g, the previous form is written
R1
(9) H 0 (β) = 12 0 [u0 (g(a1 (γ), β))(a1 (γ)−P0 )+u0 (g(a2 (γ), β))(a2 (γ)−P0 )]f (γ)dγ
An analogous calculation gives the form of the second derivative of H:
1 1 00
(10) H (β) = 2 0 [u (g(a1 (γ), β))(a1 (γ) − P0 )2 + u00 (g(a2 (γ), β))(a2 (γ) −
00
R
2
P0 ) ]f (γ)dγ
Since u is concave, u00 (g(a1 (γ), β)) ≤ 0 and u00 (g(a2 (γ), β)) ≤ 0 for any
γ ∈ [0, 1], thus by (10) H 00 (β) ≤ 0. Thus H is concave.
(ii) follows from (i).

The following result is the possibilistic version of a Mossin theorem ([20] or

Proposition 3.1 of [11], p. 51).

Proposition 5.2 Assume that u0 > 0 and u00 ≤ 0.

(i) If λ = 0 then the optimal solution of (8) is β ∗ = 1.
(ii) If λ > 0 then the optimal solution of (8) is β ∗ < 1.

Proof. (i) If β = 1 then by (5), g(x, 1) = w0 − P0 for all x. By applying (9) in

this particularRcase one obtains:
1
H 0 (1) = 12 0 [u0 (w0 − P0 )(a1 (γ) − P0 ) + u0 (w0 − P0 )(a2 (γ) − P0 )]f (γ)dγ
R1 R1
= u0 (w0 − P0 )[ 21 0 (a1 (γ) + a2 (γ))f (γ)dγ − P0 0 f (γ)dγ]
= [E(f, A) − P0 ]u0 (w0 − P0 )
But E(f, A) − P0 = E(f, A) − (1 + λ)E(f, A) = −λE(f, A) thus
H 0 (1) = −λu0 (w0 − P0 )E(f, A)
For λ = 0 we obtain H 0 (1) = 0, thus, by Proposition 5.1 (ii), β ∗ = 1 is the
optimal solution of (8).
(ii) By the hypothesis supp(A) ⊆ R+ and since A is not a point fuzzy
number it follows E(f, A) > 0. Since u0 (w0 − P0 ) > 0 and λ > 0 we have
H 0 (1) = −λu0 (w0 − P0 )E(f, A) < 0. Assume that the optimal solution β ∗
of problem (8) verifies β ∗ ≥ 1. By Proposition 5.1 (i), H is concave thus its
derivative H 0 is decreasing. It follows H 0 (β ∗ ) ≤ H 0 (1) < 0, which contradicts
H 0 (β ∗ ) = 0. Therefore β ∗ < 1.

Proposition 5.3 If λ = 0 then the possibilistic expected final wealth E(f, g(A, β))
is constant.

Proof. If λ = 0 then P0 = E(f, A), thus g(x, β) = w0 − βE(f, A) − (1 − β)x

for all x and β. By Definition 3.1 we compute E(f, g(A, β)):
R1
E(f, g(A, β)) = 21 0 [g(a1 (γ), β) + g(a2 (γ), β)]f (γ)dγ

10
 We notice that
g(a1 (γ), β) + g(a2 (γ), β) = 2[w0 − βE(f, A)] − (1 − β)(a1 (γ) + a2 (γ))
thus R1 R1
E(f, g(A, β)) = (w0 −βE(f, A)) 0 f (γ)dγ−(1−β) 21 0 (a1 (γ)+a2 (γ))f (γ)dγ
= w0 − βE(f, A) − (1 − β)E(f, A) = w0 − E(f, A)
It follows that E(f, g(A, β)) does not depend on β.

For the rest of the section we assume that f (γ) = 2γ for any γ ∈ [0, 1].

Proposition 5.4 If u00 (x) < 0 for all x then H 00 (β) < 0 for all β.

Proof.
By (10)
R1
(11) H 00 (β) = 0 [u00 (g(a1 (γ), β))(a1 (γ) − P0 )2 + u00 (g(a2 (γ), β))(a2 (γ) −
P0 )2 ]f (γ)dγ
supp(A) having more than one point, a1 (γ) 6= a2 (γ) for any γ ∈ [0, 1],
therefore (a1 (γ) − P0 )2 > 0 or (a2 (γ) − P0 )2 > 0 for all γ ∈ [0, 1]. Since
u00 (g(a1 (γ), β)) < 0 and u00 (g(a2 (γ), β)) < 0 for any γ ∈ [0, 1], the following
inequality is verified:
[u00 (g(a1 (γ), β))(a1 (γ) − P0 )2 + u00 (g(a2 (γ), β))(a2 (γ) − P0 )2 ]γ < 0.
Then, by (11) it follows H 00 (β) < 0 for all β.

We consider two agents with the utility functions u1 , u2 such that u01 > 0,
u02 > 0, u001 < 0 and u002 < 0. Let β1∗ , β2∗ be the optimal coinsurance rates
associated with u1 , u2 (in a possibilistic sense).

Proposition 5.5 If the agent u1 is more risk–averse than u2 then β1∗ ≥ β2∗ .

Proof. We consider
R the functions H1 (β), H2 (β) associated with u1 , u2 . By (7)
H1 (β) = R0 [u1 (g(a1 (γ), β)) + u1 (g(a2 (γ), β))]γdγ
H2 (β) = 0 [u2 (g(a1 (γ), β)) + u2 (g(a2 (γ), β))]γdγ
If λ = 0 then by Proposition 5.2 (i), β1∗ = β2∗ , therefore the assertion is true.
Assume that λ > 0. Using Proposition 4.8 (ii) and doing the same as in the
proof of Proposition 3.2 of [11], p. 53, one proves that for any x the following
inequality holds:
(x − P0 )u02 (w0 − (1 − β1∗ )x − β1∗ P0 ) ≤ (x − P0 )u01 (w0 − (1 − β1∗ )x − β1∗ P0 )
Taking into account (5), the previous inequality is written:
(x − P0 )u02 (g(x, β1∗ )) ≤ (x − P0 )u01 (g(x, β1∗ )).
If x takes the values a1 (γ) and a2 (γ) the following inequalities are obtained:
(a1 (γ) − P0 )u02 (g(a1 (γ), β1∗ )) ≤ (a1 (γ) − P0 )u01 (g(a1 (γ), β1∗ ))
(a2 (γ) − P0 )u02 (g(a2 (γ), β1∗ )) ≤ (a2 (γ) − P0 )u01 (g(a2 (γ), β1∗ ))
From these inequalities and (9) it follows
R1
H20 (β1∗ ) = 0 [u02 (g(a1 (γ), β1∗ ))(a1 (γ)−P0 )+u02 (g(a2 (γ), β1∗ ))(a2 (γ)−P0 )]γdγ ≤
R1 0
≤ 0 [u1 (g(a1 (γ), β1∗ ))(a1 (γ) − P0 ) + u01 (g(a2 (γ), β1∗ ))(a2 (γ) − P0 )]γdγ =
= H10 (β1∗ ).

11
 By hypothesis H20 is strictly decreasing, thus from H20 (β1∗ ) ≤ 0 and H20 (β2∗ ) ≤
0 , β2∗ ≤ β1∗ .

6 The approximate calculation of optimal coin-

surance rate
In the previous section we have seen that the optimal coinsurance rate β ∗ is the
solution of the equation H 0 (β) = 0. An approximate calculation formula for β ∗
will be proved in this section.
Let f : [0, 1] → R be a weighting function, A a fuzzy number and u a
utility function of class C 2 such that u0 > 0 and u00 < 0. Assume that [A]γ =
[a1 (γ), a2 (γ)] for any γ ∈ [0, 1].
1
R1
Lemma 6.1 V ar(f, A) + E 2 (f, A) = 2 0
[a21 (γ) + a22 (γ)]f (γ)dγ

Proof. According to the definition of V ar(f, A) and E(f, A) the following

equalities take place:
R1
V ar(f, A) = 12 0 [(a1 (γ) − E(f, A))2 + (a2 (γ) − E(f, A))2 ]f (γ)dγ
R1 R1
= 21 0 [a21 (γ) + a22 (γ)]f (γ)dγ − 2E(f, A) 0 a1 (γ)+a
2
2 (γ)
f (γ)dγ + E 2 (f, A)
1
= 21 0 [a21 (γ) + a22 (γ)]f (γ)dγ − E 2 (f, A)
R

Next we keep all notations on coinsurance problem from the previous section.

Proposition 6.2 If w = w0 − P0 then an approximate value of the optimal

coinsurance rate β ∗ is
0
(1) β ∗ ≈ 1 − uu00(w) E(f,A)−P0
(w) V ar(f,A)+(E(f,A)−P0 )2

Proof. With the notation w = w0 − P0 we have g(x, β) = w − (1 − β)(x − P0 ),

thus using the first order Taylor approximation to u0 (w −(1−β)(x−P0 )) around
w we obtain
(2) u0 (g(x, β)) = u0 (w − (1 − β))(x − P0 )) ≈ u0 (w) − (1 − β)(x − P0 )u00 (w)
Using formula (9) of Section 5 and (2) it follows
R1
H 0 (β) = 12 0 [u0 (g(a1 (γ), β))(a1 (γ)−P0 )+u0 (g(a2 (γ), β))(a2 (γ)−P0 )]f (γ)dγ
R1 R1
≈ 21 0 [u0 (w)(a1 (γ)−P0 )−(1−β)u00 (w)(a1 (γ)−P0 )2 ]f (γ)dγ+ 21 0 [u0 (w)(a2 (γ)−
P0 ) − (1 − β)u00 (w)(a2 (γ) − P0 )2 ]f (γ)dγ
By denoting
R1
I1 = 21 0 [a1 (γ) + a2 (γ) − 2P0 ]f (γ)dγ
R1
I2 = 12 0 [(a1 (γ) − P0 )2 + (a2 (γ) − P0 )2 ]f (γ)dγ
it follows H 0 (β) ≈ u0 (w)I1 − u00 (w)(1 − β)I2 .
We compute now I1 and I2 :

12
 R1 R1
I1 = 12 0 [a1 (γ) + a2 (γ)]f (γ)dγ − P0 0 f (γ)dγ = E(f, A) − P0
R1
I2 = 21 0 [a21 (γ) + a22 (γ) − 2P0 (a1 (γ) + a2 (γ)) + 2P02 ]f (γ)dγ
R1 R1
= 21 0 [a21 (γ) + a22 (γ)]f (γ)dγ − 2P0 0 a1 (γ)+a2
2 (γ)
f (γ)dγ + P02
1 1 2 2 2
R
= 2 0 [a1 (γ) + a2 (γ)]f (γ)dγ − 2P0 E(f, A) + P0 .
By Lemma 6.1
I2 = V ar(f, A) + E 2 (f, A) − 2P0 E(f, A) + P02 = V ar(f, A) + (E(f, A) − P0 )2 .
We replace I1 and I2 in the approximate value of H 0 (β) and we obtain
H 0 (β) ≈ u0 (w)I1 − u00 (w)(1 − β)I2 =
= u0 (w)(E(f, A) − P0 ) − u00 (w)(1 − β)[V ar(f, A) + (E(f, A) − P0 )2 ]
Then from the equation H 0 (β ∗ ) = 0 one obtains
u0 (w)(E(f, A) − P0 ) ≈ (1 − β ∗ )u00 (w)[V ar(f, A) + (E(f, A) − P0 )2 ]
thus 0
β ∗ ≈ 1 − uu00(w) E(f,A)−P0
(w) V ar(f,A)+(E(f,A)−P0 )2 .

Taking into account Definition 4.7, formula (1) can be written

E(f,A)−P0
β ∗ ≈ 1 − ru 1(w) V ar(f,A)+(E(f,A)−P0)
2.

Example 6.3 Assume that the weighting function f has the form f (γ) = 2γ,
γ ∈ [0, 1], A is the triangular fuzzy number A = (a, ν, µ) and u(x) = −e−x for
any x ∈ R. In this case according to [4] or [25] we have
µ2 +ν 2 +µγ
E(f, A) = a2 + µ−ν 6 ; V ar(f, A) = 18 .
0
One notices that uu00(x)
(x) = −1 for any x ∈ R, therefore by (1) the approximate
value of the optimal coinsurance rate is
a µ−ν
2 + 6 −P0
ρ∗ ≈ 1 + µ2 +ν 2 +µγ µ−ν
.
18 +( a
2+ 6 −P0 )2

7 Conclusions
This paper proposes a possibilistic model of coinsurance.
The contributions of the paper are summarized as follows:
– the definition of the notions of possibilistic risk–averse, possibilistic risk–
lover and possibilistic risk–neutral and their characterization
– the formulation of coinsurance problem in terms of possibility theory, the
study of the existence and the properties of the optimal coinsurance rate, its
approximate calculation and its variation with the agent’s risk aversion
The comparison of the probabilistic model of [11] with the model of this
paper and their application in significant concrete situations remain problems
for future research.

Acknowledgments
The work of Irina Georgescu was supported by CNCSIS-UEFISCSU project
number PN II-RU 651/2010.

13
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