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Choice of Purchasing Arrangements in Insurance Markets

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  • Cotter, Kevin D
  • Jensen, Gail A

Abstract

A simple dynamic model helps explain why risk-pooling purchasing arrangements evolved for health, disability, and term life insurance but not for property, automobile, or homeowners' insurance, and why whole-life policies typify life insurance purchased on an individual basis. We show that risk-pooling purchases facilitate insurance against unpredictable changes in one's risk type, but such contracts prevail in competitive equilibrium only when the loss probabilities increase with age, as they do for health, disability, and life insurance. In contrast, when the loss probability declines with age (as it does for automobile insurance), then competitive equilibrium entails separating insurance contracts. Copyright 1989 by Kluwer Academic Publishers

Suggested Citation

  • Cotter, Kevin D & Jensen, Gail A, 1989. "Choice of Purchasing Arrangements in Insurance Markets," Journal of Risk and Uncertainty, Springer, vol. 2(4), pages 405-414, December.
    • Handle: RePEc:kap:jrisku:v:2:y:1989:i:4:p:405-14
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    Cited by:

    1. Nilssen, Tore, 2000. "Consumer lock-in with asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 641-666, May.
    2. M M Segovia-Gonzalez & I Contreras & C Mar-Molinero, 2009. "A DEA analysis of risk, cost, and revenues in insurance," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(11), pages 1483-1494, November.

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