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Moral Hazard In Dynamic Insurance Classification Risk And Prepayment

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  • Renaud Bourlès

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper examines the effect of moral hazard on dynamic insurance contract. It models primary prevention in a two period model with classification risk. Agents' preferences appear to play an important role in the determination of preventive effort and prepayment. If absolute prudence is larger that absolute risk aversion, moral hazard increases prepayment of premium and classification risk. This highlights a tradeoff between prevention and prepayment that arises from the classification risk. An increase in the difference between prudence and twice risk aversion (that we define as the degree of foresight) moreover makes dynamic insurance contracts more stable (when competing with spot insurance) if the cost of prevention is low enough when agents preferences exhibit CRRA. Under a formulated utility function with linear reciprocal derivative, we finally show that an increase in agents' degree of foresight enhances the stability of dynamic contract and the extent of prepayment.

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  • Renaud Bourlès, 2008. "Moral Hazard In Dynamic Insurance Classification Risk And Prepayment," Working Papers halshs-00340830, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00340830
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00340830
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    1. Carole Bernard & Gero Junike & Thibaut Lux & Steven Vanduffel, 2022. "Cost-efficient Payoffs under Model Ambiguity," Papers 2207.02948, arXiv.org, revised Aug 2023.

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    More about this item

    Keywords

    Dynamic Insurance; Classification Risk; Moral Hazard; Prudence; Assurance dynamique; risque de classification; aléa moral; prudence.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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