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The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed

Author

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  • Bertrand Villeneuve

    (Institut d'Economie Industrielle, Université de Toulouse 1, Place Anatole France, 31042 Toulouse cedex, France, e-mail: villeneu@cict.fr)

Abstract

This article models a situation in which a monopolistic insurer evaluates risk better than its customers. The resulting equilibrium allocations are compared to the consequences of the standard adverse selection hypothesis. On the positive side, they exhibit the property that low-risk people are better covered than higher-risk people. On the normative side, the article shows that there are two reasons for avoiding excessive risk classification: one is the classical destruction of insurance possibilities, and the other comes from the distrustful atmosphere generated by new asymmetric information. The Geneva Papers on Risk and Insurance Theory (2000) 25, 65–79. doi:10.1023/A:1008749524517

Suggested Citation

  • Bertrand Villeneuve, 2000. "The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 25(1), pages 65-79, June.
    • Handle: RePEc:pal:genrir:v:25:y:2000:i:1:p:65-79
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