Using a corporate usefulness function to determine an acceptable amount of business insurance

Igor Pistunov


The main problem in concluding business insurance contracts has the main obstacle – the coordination of the insurance premium between the corporation and the insurer. The notion of the Neumann-Morgenstern utility function was used to determine the level of interest of the corporation's employees. Based on the method developed earlier by the author to determine the utility function for corporations, a number of meetings were held with the management of the NGO "South" to determine the utility function of each group. To do this, they were offered a conditional game with the opportunity to win a large or small amount by paying some intermediate amount. At the same time, the probability of winning a large sum changed until the player became indifferent to winning or losing.

The data were pooled and approximated by a transcendental model that included a power function, an exponent, and a sine wave. The search for model coefficients was performed by the method of optimization selection through the "Solution Search" function of Excel spreadsheets. The quality of the approximation was tested by Pearson's test with a confidence level of 0.8. The quality of the approximation is also confirmed by the almost complete coincidence of the graphs of the original function and the approximated one.

The method of finding an acceptable amount of business insurance on the principle of greatest utility is given. To do this, the values of the probability of winning, the amounts of winnings and losses were the usefulness of this financial transaction with the use of approximation. Then, the weighted average utility was determined by the product of the probability of winning on the utility of the amount of gain with the addition of the product of the probability of loss on the utility of the amount of loss.

According to the developed methodology, acceptable insurance premiums were calculated for four launches under the Sea Start program for the case when the insurance company independently determined the probability of a failed launch. It is shown that the sum insured demanded by the insurers significantly exceeded the amount that the corporation agreed to pay.

The conclusions provide an additional calculation for a failed start-up and show that in the latter case it would be more profitable to abandon the insurance. It is also recommended before concluding the insurance contract to perform the proposed procedure to reduce the period of approval of the amount of insurance premiums.


corporate utility function; transcendent model; acceptable amount of insurance

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Science Works Journal "Ekonomichnyy analiz"

ISSN 1993-0259 (Print)  ISSN 2219-4649 (Online) DOI: 10.35774/econa

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