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Insurance Contracts Under Adverse Selection with Random Loss Severity

Author

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  • Fluet, C.
  • Pannequin, F.

Abstract

Dans l'analyse des problèmes d'antisélection en assurance, on suppose généralement que la richesse des individus est une variable aléqtoire binaire, selon que l'individu subit ou non une perte. Ceci interdit d'analyser la forme du contrat d'assurance partielle destiné aux individus à faible risque. Nous généralisons ici le modèle standard au cas où il y a plusieurs valeurs de perte, en considérant des distributions arbitraires sur un continuum de pertes. Nous montrons que l'espérance de perte est un critère suffisant pour identifier les catégories d'individus à risque faible et à risque élevé, de façon à reproduire les résultats de Rothschild et Stiglitz sur les marchés d'assurance concurrentiels. Nous montrons que la forme du contrat destiné aux individus à faible risque dépend de la nature de l'information révélée par le montant de la perte. Dans l'analyse de ce contrat, nous prenons également en considération la possibilité d'asymétries d'information ex post relativement aux états de perte. In the literature on adverse selection in insurance markets, it is usually assumed that the loss faced by individuals is single-valued. This precludes the analysis of the form of the incomplete coverage contract designed for the low-risk class. In the present paper, the two-type adverse selection model is extended to the case where the severity of the loss is random, by considering general distributions over a continuum of losses. We show that the expected value of the loss is sufficient to characterize the high and low risk types and to generalize Rothschild and Stiglitz' competitive market results. The form of the second-best contract for the low risks is shown to depend on the nature of the information revealed by the severity of the loss. In analyzing the form of this contract, we also allow for the possibility of ex post informational symmetries with respect to loss events.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Fluet, C. & Pannequin, F., 1995. "Insurance Contracts Under Adverse Selection with Random Loss Severity," Papers 30, Laval - Laboratoire Econometrie.
  • Handle: RePEc:fth:lavale:30
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    Cited by:

    1. James A. Ligon & Paul D. Thistle, 2008. "Adverse Selection With Frequency and Severity Risk: Alternative Risk-Sharing Provisions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 825-846.
    2. Dionne, G. & Doherty, N., 1991. "Adverse Selection In Insurance Markets: A Selective Survey," Cahiers de recherche 9105, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    3. Georges Dionne & Nathalie Fombaron & Neil Doherty, 2012. "Adverse Selection in Insurance Contracting," Cahiers de recherche 1231, CIRPEE.
    4. Dionne, Georges & Vanasse, Charles, 1997. "Une évaluation empirique de la nouvelle tarification de l’assurance automobile (1992) au Québec," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(1), pages 47-80, mars-juin.

    More about this item

    Keywords

    CONTRACTS; INSURANCE; UNCERTAINTY; RISK;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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