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Commitment and Lapse Behavior in Long-Term Insurance: A Case Study

  • Jean Pinquet

    (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS, UP10 - Université Paris 10, Paris Ouest Nanterre La Défense)

  • Montserrat Guillén

    (UB - Universitat de Barcelona)

  • Mercedes Ayuso

    (UB - Universitat de Barcelona)

This paper presents a case study of a portfolio of individual long-term insurance contracts sold by a Spanish mutual company. We describe the risk levels, the rating structure and the implied cross-subsidies on a portfolio of policies providing health, life and long-term care insurance. We show evidence of reclassification risk through the history of disability spells. We also analyze the lapse behavior and seek to provide a rationale for the portfolio's dynamics. Lastly, we draw conclusions regarding the design of such contracts.

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Paper provided by HAL in its series Post-Print with number hal-00374303.

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Date of creation: 2011
Date of revision:
Publication status: Published in The Journal of Risk and Insurance, 2011, 78 (4), pp.983-1002. <10.1111/j.1539-6975.2011.01420.x>
Handle: RePEc:hal:journl:hal-00374303
DOI: 10.1111/j.1539-6975.2011.01420.x
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  1. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-56, March.
  2. Jean Pinquet & Guillén Montserrat, 2008. "Long-Term Care: Risk Description of a Spanish Portfolio and Economic Analysis of the Timing of Insurance Purchase," Post-Print hal-00343104, HAL.
  3. Wenan Fei & Claude Fluet & Harris Schlesinger, 2008. "Uncertain Bequest Needs and Long-Term Insurance Contracts," CESifo Working Paper Series 2505, CESifo Group Munich.
  4. H. J. Smoluk, 2009. "Long-Term Disability Claims Rates and the Consumption-to-Wealth Ratio," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 109-131.
  5. Jeffrey R. Brown & Amy Finkelstein, 2009. "The Private Market for Long-Term Care Insurance in the United States: A Review of the Evidence," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 5-29.
  6. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-35, April.
  7. repec:oup:qjecon:v:118:y:2003:i:1:p:299-327 is not listed on IDEAS
  8. J. Pinquet, 1997. "Experience rating through heterogeneous models," THEMA Working Papers 97-25, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  9. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May.
  10. Kunreuther, Howard & Pauly, Mark, 1985. "Market equilibrium with private knowledge : An insurance example," Journal of Public Economics, Elsevier, vol. 26(3), pages 269-288, April.
  11. Michael K. McShane & Larry A. Cox, 2009. "Issuance Decisions and Strategic Focus: The Case of Long-Term Care Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 87-108.
  12. Brown, Jeffrey R. & Finkelstein, Amy, 2007. "Why is the market for long-term care insurance so small?," Journal of Public Economics, Elsevier, vol. 91(10), pages 1967-1991, November.
  13. Glenn Daily & Igal Hendel & Alessandro Lizzeri, 2008. "Does the Secondary Life Insurance Market Threaten Dynamic Insurance?," American Economic Review, American Economic Association, vol. 98(2), pages 151-56, May.
  14. David C. Webb, 2009. "Asymmetric Information, Long-Term Care Insurance, and Annuities: The Case for Bundled Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 53-85.
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