Optimal Deductible in Liability Insurance with Regard to the Limited and Unlimited Protection

The main purpose of this study is to investigate the optimal amount of deductible in liability insurance by considering some key features of liability insurance. In investigating the actual liability insurance market, we focus on the defense policy. Some findings of this study are consistent with those of Mossin (1968) and Cummins and Mahul (2004), which analyze property insurance. For example, the finding on whether insurance is a normal or inferior good is maintained even when the defense policy is considered. However, our finding reveals that claim settlement costs, which are not investigated in Mossin (1968) and Cummins and Mahul (2004), determine whether policyholders choose an insurance contract with a deductible.