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Mortgage life insurance: a rationale for a time limit in switching rights

Author

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  • Bertrand Villeneuve

    (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)

Abstract

I examine competition in the sector of mortgage life insurance, in particular the periodic switching right (PSR), by which the borrower can change his insurer once every period (say, every year). The PSR is likely to have pro competitive effects (lower premium), but by the same move, to lead to excessive segmentation. The main theoretical prediction of the PSR is that, in equilibrium, everyone will pay every year a premium reflecting his current risk, meaning that the risk of future risk evolution is not covered. This destruction of insurance is appreciated negatively by consumers. The trade-off is between, on the one hand, a lower price for insurance, and on the other hand, a lower quality of insurance. I simulate the cost of the PSR and find about 5–15 % of the total insurance cost. This order of magnitude is slightly smaller than the benefit one can expect from increased competition. All in all, a switching right limited in time would bring the benefits of competition and avoid most of the cost of segmentation.

Suggested Citation

  • Bertrand Villeneuve, 2014. "Mortgage life insurance: a rationale for a time limit in switching rights," Post-Print hal-01685921, HAL.
  • Handle: RePEc:hal:journl:hal-01685921
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01685921
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    References listed on IDEAS

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    1. 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 209-235, April.
    2. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    3. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," European Economic Review, Elsevier, vol. 49(2), pages 321-340, February.
    4. Cooper, Russell & Hayes, Beth, 1987. "Multi-period insurance contracts," International Journal of Industrial Organization, Elsevier, vol. 5(2), pages 211-231.
    5. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    6. G. Dionne & N. Doherty & N. Fombaron, 2000. "Adverse Selection in Insurance Markets," THEMA Working Papers 2000-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    7. 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.
    8. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
    9. repec:dau:papers:123456789/5363 is not listed on IDEAS
    10. Pinar Karaca-Mandic & Jean Abraham & Charles Phelps, 2011. "How do health insurance loading fees vary by group size?: implications for Healthcare reform," International Journal of Health Economics and Management, Springer, vol. 11(3), pages 181-207, September.
    11. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
    12. Bertrand Villeneuve, 2003. "Mandatory Pensions and the Intensity of Adverse Selection in Life Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 527-548, September.
    13. Arthur J. Hosios & Michael Peters, 1989. "Repeated Insurance Contracts with Adverse Selection and Limited Commitment," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 229-253.
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    1. repec:pal:genrir:v:44:y:2019:i:1:d:10.1057_s10713-018-0036-9 is not listed on IDEAS
    2. repec:kap:geneva:v:44:y:2019:i:1:d:10.1057_s10713-018-0036-9 is not listed on IDEAS

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