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Adverse Selection, Aggregate Uncertainty, and the Role for Mutual Insurance Contracts

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Author Info

  • Smith, Bruce D
  • Stutzer, Michael J

Abstract

A 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 Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 63 (1990)
Issue (Month): 4 (October)
Pages: 493-510

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Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:4:p:493-510

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. F. Barigozzi & R. Bourles & D. Henriet & G. Pignataro, 2011. "Improving Compliance With Preventive Care: Cooperation in Mutual Health Insurance," Working Papers wp765, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Bourlès, Renaud, 2007. "On the Emergence of Private Insurance in Presence of Mutual Agreements," MPRA Paper 5821, University Library of Munich, Germany.
  3. Magnus Lindmark & Lars-Fredrik Andersson & Mike Adams, 2006. "The Evolution and Development of the Swedish Insurance Market," Accounting History Review, Taylor & Francis Journals, vol. 16(3), pages 341-370.
  4. Laux, Christian & Muermann, Alexander, 2010. "Financing risk transfer under governance problems: Mutual versus stock insurers," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 333-354, July.
  5. Laux, Christian & Muermann, Alexander, 2006. "Mutual versus stock insurers: Fair premium, capital, and solvency," CFS Working Paper Series 2006/26, Center for Financial Studies (CFS).
  6. Georges Dionne & Nathalie Fombaron & Neil Doherty, 2012. "Adverse Selection in Insurance Contracting," Cahiers de recherche 1231, CIRPEE.
  7. Eling, Martin & Jia, Ruo & Yao, Yi, . "Evidence of Adverse Selection in the Group Insurance Market," Working Papers on Finance 1403, University of St. Gallen, School of Finance.
  8. Pierre Picard, 2009. "Participating insurance contracts and the Rothschild-Stiglitz equilibrium puzzle," Working Papers hal-00413825, HAL.

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