We generalize Merton's framework by incorporating an insurable loss . Motivated by new insurance products, we allow not only the financial market but also the insurable loss to depend on the regime of the economy. An investor wants to select an optimal consumption, investment, and insurance policy that maximizes his expected total discounted utility of consumption over an infinite time horizon. For the case of hyperbolic absolute risk aversion (HARA) utility functions, we obtain the first explicit solutions for  optimal consumption, investment, and insurance problem when there is regime switching. We determine that the optimal insurance contract is either no-insurance or deductible insurance, and calculate when it is optimal to buy insurance. The optimal policy depends strongly on the regime of the economy. Through an economic analysis, we calculate the advantage of buying insurance. We also observe that as long as optimal insurance is nonzero in one regime, investors gain benefits in all regimes from insurance.
We consider an investor who wants to select her/his optimal consumption, investment and insurance policies . Motivated by new insurance products, we allow not only the financial marke but also the insurable loss to depend on the regime of the economy. The objective of the investor is to maximize her/ his expected total discounted utility of consumption over an infinite time horizon. For the case of hyperbolic absolute risk aversion (HARA) utility functions, we obtain the first explicit solutions for simultaneous optimal consumption, investment, and insurance problems when there is regime switching. We determine that the optimal insurance contract is either no-insurance or deductible insurance, and calculate when it is optimal to buy insurance. The optimal policy depends strongly on the regime of the economy. Through an economic analysis, we calculate the advantage of buying insurance.
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generalize Merton's framework by incorporating an insurable loss
consider an investor who wants to select her/his optimal consumption, investment and insurance policies
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market
marke
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An investor wants to select an optimal consumption, investment, and insurance policy that maximizes
The objective of the investor is to maximize her/
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simultaneous
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problem
problems
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insurance. We also observe that as long as optimal insurance is nonzero in one regime, investors gain benefits in all regimes from