IDEAS home Printed from
   My bibliography  Save this article

A Behavioral Model of Insurance Pricing


  • James A. Ligon
  • Paul D. Thistle


We develop a model of price competition between insurers where insurers maximize expected profit subject to a solvency constraint. Insurers base prices in part on expected losses, the estimates of which are updated in a Bayesian fashion. We assume that insurers are overconfident—they overestimate the precision of their private signal about expected losses. This leads insurers to overreact to their private signal on expected losses. The consequence is that prices may cycle and that the distribution of price changes may be positively skewed because of the role played by the solvency constraint.

Suggested Citation

  • James A. Ligon & Paul D. Thistle, 2007. "A Behavioral Model of Insurance Pricing," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 30(1), pages 46-61.
  • Handle: RePEc:wri:journl:v:30:y:2007:i:1:p:46-61

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    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:wri:journl:v:30:y:2007:i:1:p:46-61. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (James Barrese). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.