A DECISION-MAKING MODEL REGARDING PROJECT INVESTMENT RISK INSURANCE IN THE CONTEXT OF BEHAVIORAL FINANCE AND CONTRACT THEORY

Abstract

Insurance of investment risks is hampered by a number of reasons, among which there is a lack of convenient and effective models for making relevant decisions. The purpose of the study is to create a conceptual decision-making model regarding the key parameters of the project investment risk insurance contract in the context of behavioural finance. The subject of the study is project risk management in the context of investor-insured and insurer relations. The object of the study is the procedure and mathematical apparatus for determining the recommended basic contract parameters for the insurance of investment risks. The key methodology underpinned by the study is benefit-cost analysis. The expected net present value (ENPV) is an analytical method for evaluating alternative options for the implementation of an investment project under conditions of uncertainty. The conclusion of an insurance agreement does not reduce the value of money over time-in the case of project insurance, investors will apply the same criterion interest rate of capitalization as without insurance. The reduction of project risks for the insured as a result of insurance occurs due to the improvement of expected cash flows in the sum of probable scenarios. The article offers a conceptual model of decision-making that is focused on the policyholder's expectations, takes into account the interests of the insurer, provides a multi-scenario forecast of cash flows of an investment project, applies a schedule of normal probability distribution and includes an element of protection against moral hazard. In addition to the sum insured and the insurance premium, the model can be used to calculate the residual risk (the share of the risk that remains with the insured after concluding the insurance contract). This parameter characterizes the policyholder's interest in applying various methods of influencing the risk, not only insurance. The specified model will contribute to the conclusion of contracts by insurers and policyholders on mutually beneficial terms, activation and development of the investment segment of the insurance market of Ukraine. The conceptual model is illustrated in a visual example, as a result of which it can be concluded that the proposed approach can be useful in practice when concluding contracts between insurers and policyholders.