Insurance bargaining under risk aversion

This paper considers a two-person insurance bargaining game in which a risk-averse client is bargaining with an insurer. Using a co-operative Nash bargaining solution for this game, Kihlstrom and Roth (Kihlstrom, R.E., Roth, A.E., 1982. Risk aversion and the negotiation of insurance contracts, J. Risk Insurance 49, 372-387) showed that the insurer's expected profit is higher when bargaining with a more risk-averse client. We show that essentially the same result can be derived in a non-co-operative alternating offer bargaining game of complete and perfect information, where we account for 'risk aversion' of the players through the discount factor. We extend the discussion by considering the impact of the characteristics of the bargaining game on the effect of risk aversion. (C) 2002 Elsevier Science B.V. All rights reserved.