IDEAS home Printed from https://ideas.repec.org/a/eee/insuma/v50y2012i3p462-469.html
   My bibliography  Save this article

Insurance pricing with complete information, state-dependent utility, and production costs

Author

Listed:
  • Ramsay, Colin M.
  • Oguledo, Victor I.

Abstract

We consider a group of identical risk-neutral insurers selling single-period indemnity insurance policies. The insurance market consists of individuals with common state-dependent utility function who are identical except for their known accident probability q. Insurers incur production costs (commonly called expenses or transaction costs by actuaries) that are proportional to the amount of insurance purchased and to the premium charged. By introducing the concept of insurance desirability, we prove that the existence of insurer expenses generates a pair of constants qmin and qmax that naturally partitions the applicant pool into three mutually exclusive and exhaustive groups of individuals: those individuals with accident probability q∈[0,qmin) are insurable but do not desire insurance, those individuals with accident probability q∈[qmin,qmax] are insurable and desire insurance, and those individuals with accident probability q∈(qmax,1] desire insurance but are uninsurable. We also prove that, depending on the level of q and the marginal rate of substitution between states, it may be optimal for individuals to buy complete (full) insurance, partial insurance, or no insurance at all. Finally, we prove that when q is known in monopolistic markets (i.e., markets with a single insurer), applicants may be induced to “over insure” whenever partial insurance is bought.

Suggested Citation

  • Ramsay, Colin M. & Oguledo, Victor I., 2012. "Insurance pricing with complete information, state-dependent utility, and production costs," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 462-469.
    • Handle: RePEc:eee:insuma:v:50:y:2012:i:3:p:462-469
    DOI: 10.1016/j.insmatheco.2012.02.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167668712000200
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.insmatheco.2012.02.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," LIDAM Reprints CORE 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Joseph E. Stiglitz, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 407-430.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yann Braouezec, 2015. "Public versus Private Insurance System with (and without) Transaction Costs: Optimal Segmentation Policy of an Informed monopolistPublic versus Private Insurance System with (and without) Transaction ," Working Papers 2013-ECO-23, IESEG School of Management, revised May 2014.
    2. hector chade, 2016. "The Market for Lemons: Costly Insurance, Coverage Denials, and Pooling," 2016 Meeting Papers 1097, Society for Economic Dynamics.
    3. Ramsay, Colin M. & Oguledo, Victor I. & Pathak, Priya, 2013. "Pricing high-risk and low-risk insurance contracts with incomplete information and production costs," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 606-614.
    4. Torraca, Ana Patrícia & Fanzeres, Bruno, 2021. "Optimal insurance contract specification in the upstream sector of the oil and gas industry," European Journal of Operational Research, Elsevier, vol. 295(2), pages 718-732.
    5. Jost, Peter-J., 2016. "Competitive insurance pricing with complete information, loss-averse utility and finitely many policies," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 11-21.
    6. Kartashova Olga Ivanovna & Molchanova Olga Vladimirovna & Axana Turgaeva, 2018. "Insurance Risks Management Methodology," JRFM, MDPI, vol. 11(4), pages 1-15, October.
    7. Chade, Hector & Schlee, Edward E., 2020. "Insurance as a lemons market: Coverage denials and pooling," Journal of Economic Theory, Elsevier, vol. 189(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Georges Dionne & Scott Harrington, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    2. de Meza, David & Xie, Gang, 2014. "The deadweight gain of insurance taxation when risky activities are optional," Journal of Public Economics, Elsevier, vol. 115(C), pages 109-116.
    3. Li, Dongchen & Zeng, Yan & Zhao, Yixing, 2025. "The impact of intermediaries on insurance demand and pricing," Insurance: Mathematics and Economics, Elsevier, vol. 122(C), pages 143-156.
    4. Nobel Prize Committee, 2001. "George A. Akerlof, A. Michael Spence, Joseph E. Stiglitz: Markets with Asymmetric Information," Nobel Prize in Economics documents 2001-2, Nobel Prize Committee.
    5. Yann Braouezec, 2015. "Public versus Private Insurance System with (and without) Transaction Costs: Optimal Segmentation Policy of an Informed monopolistPublic versus Private Insurance System with (and without) Transaction ," Working Papers 2013-ECO-23, IESEG School of Management, revised May 2014.
    6. Henri Loubergé, 1998. "Risk and Insurance Economics 25 Years After," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 23(4), pages 540-567, October.
    7. Giuseppe, DE FEO & Jean, HINDRIKS, 2005. "Efficiency of Competition in Insurance Markets with Adverse Selection," Discussion Papers (ECON - Département des Sciences Economiques) 2005042, Université catholique de Louvain, Département des Sciences Economiques.
    8. Damien S Eldridge, 2007. "A Learning Theory of Referrals," Working Papers 2007.06, School of Economics, La Trobe University.
    9. Ramsay, Colin M. & Oguledo, Victor I. & Pathak, Priya, 2013. "Pricing high-risk and low-risk insurance contracts with incomplete information and production costs," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 606-614.
    10. Hofmann, Annette & Nell, Martin & Pohl, Philipp, 2007. "The optimal pricing strategy for an insurer when risk preferences are stochastically distributed," Working Papers on Risk and Insurance 20, University of Hamburg, Institute for Risk and Insurance.
    11. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2023. "Optimal Insurance: Dual Utility, Random Losses and Adverse Selection," ECONtribute Discussion Papers Series 242, University of Bonn and University of Cologne, Germany.
    12. Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 149-165.
    13. Wright, Austin L. & Sonin, Konstantin & Driscoll, Jesse & Wilson, Jarnickae, 2020. "Poverty and economic dislocation reduce compliance with COVID-19 shelter-in-place protocols," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 544-554.
    14. Jolian McHardy & Michael Reynolds & Stephen Trotter, 2012. "The Stackelberg Model as a Partial Solution to the Problem of Pricing in a Network," Working Paper series 19_12, Rimini Centre for Economic Analysis.
    15. Gregory Casey & Ryo Horii, 2024. "A Generalized Uzawa Growth Theorem," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 2(2), pages 336-373.
    16. Janvier D. Nkurunziza, 2005. "Reputation and Credit without Collateral in Africa`s Formal Banking," Economics Series Working Papers WPS/2005-02, University of Oxford, Department of Economics.
    17. Kazuhiro Kurose, 2023. "The microfoundations of evolutionary economics and its future: an essay based on the SMT approach," Evolutionary and Institutional Economics Review, Springer, vol. 20(2), pages 457-481, September.
    18. Pizer, William A. & Kopp, Raymond, 2005. "Calculating the Costs of Environmental Regulation," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 25, pages 1307-1351, Elsevier.
    19. Eduardo Borensztein & Eduardo Cavallo & Patricio Valenzuela, 2009. "Debt Sustainability Under Catastrophic Risk: The Case for Government Budget Insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 12(2), pages 273-294, September.
    20. Ho Geun Jang & Satoshi Yamazaki & Eriko Hoshino, 2019. "Profit and equity trade‐offs in the management of small pelagic fisheries: the case of the Japanese sardine fishery," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 63(3), pages 549-574, July.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:50:y:2012:i:3:p:462-469. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505554 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.