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Time, Risk, Precommitment, and Adverse Selection in Competitive Insurance Markets

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  • Mark V. Pauly
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    Abstract

    This informal paper explores models of competitive insurance market equilibrium when individuals of initially similar apparent risk experience divergence in risk levels over time. The information structure is modeled in three alternative ways: all insurers and insureds know risk at any point in time, current insurer and insured know risk, and only the individual knows risk. Insurers always know the average risk. It is shown that some models lead to “backloading” of premiums in which initial premiums are less than initial period expected expense, and that other models lead to “frontloading” of premiums and policy provisions of “guaranteed renewability.” Finally, it is shown that guaranteed renewability greatly reduces the possibility of adverse selection.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-10/cesifo1_wp1068.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1068.

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    Date of creation: 2003
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    Handle: RePEc:ces:ceswps:_1068

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    1. Bradley Herring & Mark Pauly, 2003. "Incentive-Compatible Guaranteed Renewable Health Insurance," NBER Working Papers 9888, National Bureau of Economic Research, Inc.
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