IDEAS home Printed from
   My bibliography  Save this paper

Insurance Contracts Under Adverse Selection with Random Loss Severity


  • Fluet, C.
  • Pannequin, F.


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

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    1. Richard Arnott & Joseph Stiglitz, 1993. "Price Equilibrium, Efficiency, And Decentralizability In Insurance Markets With Moral Hazard," Boston College Working Papers in Economics 254, Boston College Department of Economics.
    2. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    4. Guesnerie, Roger & Picard, Pierre & Rey, Patrick, 1989. "Adverse selection and moral hazard with risk neutral agents," European Economic Review, Elsevier, vol. 33(4), pages 807-823, April.
    5. Biglaiser Gary & Mezzetti Claudio, 1993. "Principals Competing for an Agent in the Presence of Adverse Selection and Moral Hazard," Journal of Economic Theory, Elsevier, vol. 61(2), pages 302-330, December.
    6. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
    7. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
    8. B. Caillaud & R. Guesnerie & P. Rey, 1992. "Noisy Observation in Adverse Selection Models," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 595-615.
    9. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    10. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
    11. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
    12. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    Full references (including those not matched with items on IDEAS)


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

    Cited by:

    1. 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.
    2. 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.
    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



    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


    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:fth:lavale:30. 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: (Thomas Krichel). 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.