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Separation Without Exclusion in Financial Insurance

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  • Eric Stephens
  • James R. Thompson

Abstract

type="main" xml:lang="en"> This article develops a model of linearly priced financial insurance sold by default-prone insurers. It shows that when insurers differ in their default probabilities there can exist equilibria in which different risk types partially or completely self-sort into insurance contracts offered by different insurers. Partial separation can occur when insurer default and insurance risks are uncorrelated. Full separation is possible when they are correlated. For example, low-risk insured parties may match with higher default-risk insurers, while high-risk insured parties match with lower default-risk insurers.

Suggested Citation

  • Eric Stephens & James R. Thompson, 2015. "Separation Without Exclusion in Financial Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(4), pages 853-864, December.
    • Handle: RePEc:bla:jrinsu:v:82:y:2015:i:4:p:853-864
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    References listed on IDEAS

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    Cited by:

    1. Stephens, Eric & Thompson, James R., 2017. "Information asymmetry and risk transfer markets," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 88-99.
    2. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.
    3. Lisa L. Posey & Paul D. Thistle, 2017. "Automobile Insurance and Driver Ability: Contract Choice as a Screening Mechanism," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(2), pages 141-170, September.
    4. Lisa L. Posey & Paul D. Thistle, 2017. "Automobile Insurance and Driver Ability: Contract Choice as a Screening Mechanism," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(2), pages 141-170, September.

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