Document Type


Publication Date



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.


This article was originally published in Journal of Political Economy, volume 76, issue 1, in 1968.

Peer Reviewed



University of Chicago



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.