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Pretending Ignorance Is Bliss: Competing Insurers with Heterogeneous Informational Advantages

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  • Laura Abrardi
  • Luca Colombo
  • Piero Tedeschi

Abstract

The availability of big data and analytics expertise provides insurers with informational advantages over policyholders in estimating risk. We study competition between heterogeneously informed insurers, showing that their information may or may not be revealed in equilibrium. We find that all equilibria are profitable and that noninformative equilibria entail risk pooling and possibly efficiency. In informative equilibria, the signaling problem interacts with the screening problem that arises endogenously from insurers’ revelation of information, implying underinsurance. Our main insights are robust to changes in insurers’ information precision and market concentration and to the presence of two-sided asymmetric information and withdrawable contracts.

Suggested Citation

  • Laura Abrardi & Luca Colombo & Piero Tedeschi, 2025. "Pretending Ignorance Is Bliss: Competing Insurers with Heterogeneous Informational Advantages," The Review of Financial Studies, Society for Financial Studies, vol. 38(7), pages 2005-2033.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:7:p:2005-2033.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae079
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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