This paper examines uberrimae fidei (utmost good faith) with adverse selection in an insurance market. If consumers know their risk type (they know their expected loss), and if they understand the concept of uberrimae fidei, adverse selection is completely eliminated. However, if uberrimae fidei is strictly enforced by the courts, insurers have no incentive to do any underwriting whatsoever. Therefore, whether consumers know their risk type or not, and whether they understand uberrimae fidei, is of paramount importance. If consumers don’t know their risk type or don’t understand uberrimae fidei, then the (equitable) non-strict enforcement (judicial ruling) of contracts of insurance can be efficiency enhancing as it can create an ex-ante incentive for insurers to underwrite. With an ex-ante positive probability that a court may rule equitably in favor of the insured, the insurer engages in underwriting as part of its profit maximization objective, helping insureds to discover their risk type and/or educating potential insureds on the requirements of a contract of uberrimae fidei. This paper therefore contributes a new theory of underwriting.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
10874.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: