Adverse Selection, Aggregate Uncertainty, and the Role for Mutual Insurance Contracts
AbstractA model of insurance markets analogous to that of Rothschild and Stiglitz (1976) is considered, with the additional feature that risk-neutral insurers face aggregate (undiversifiable) risk. In the presence of adverse selection and aggregate uncertainty and under a simple nondegeneracy condition on loss probabilities, the authors show that any equilibrium has the feature that some agents purchase participating policies (from mutual insurers) while others purchase nonparticipating policies (and, hence, do not share risk with their insurer). Specifically, agents with low loss probabilities signal their type by sharing aggregate risks with their insurer. Some empirical support for this prediction is provided. Copyright 1990 by the University of Chicago.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 63 (1990)
Issue (Month): 4 (October)
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- Christian Laux & Alexander Muermann, 2006. "Mutual versus Stock Insurers: Fair Premium, Capital, and Solvency," CFS Working Paper Series 2006/26, Center for Financial Studies.
- Pierre Picard, 2009. "Participating insurance contracts and the Rothschild-Stiglitz equilibrium puzzle," Working Papers hal-00413825, HAL.
- Bourlès, Renaud, 2007.
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- F. Barigozzi & R. Bourles & D. Henriet & G. Pignataro, 2011.
"Cooperation in risk-sharing agreements,"
wp765, Dipartimento Scienze Economiche, Universita' di Bologna.
- Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2011. "Risk-sharing with self-insurance: the role of cooperation," Working Papers halshs-00605267, HAL.
- Magnus Lindmark & Lars-Fredrik Andersson & Mike Adams, 2006. "The Evolution and Development of the Swedish Insurance Market," Accounting, Business and Financial History, Taylor and Francis Journals, vol. 16(3), pages 341-370.
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