There is limited treatment of the optimal protection of assets against casualty or liability loss. The problem of optimal insurance coverage is formally similar to the problem of optimal inventory stockage under uncertainty. If casualty or liability loss (demand) is less than the insurance coverage (inventory level), excessive insurance cost (inventory holding cost) is incurred. If casualty or liability loss (demand) is greater than the insurance coverage (inventory level), one must absorb the cost of the unrecoverable loss (sales loss). These two components of loss must be balanced in determining optimal insurance (inventory) levels.
Smith, Vernon L. “Optimal Insurance Coverage.” Journal of Political Economy, 76.1 (1968): 68-77
University of Chicago
This article was originally published in Journal of Political Economy, volume 76, issue 1, in 1968.