On the Competition between Insurers with Superior Information

21 Pages Posted: 1 Feb 2008 Last revised: 18 Mar 2021

See all articles by S. Hun Seog

S. Hun Seog

Seoul National University - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2008

Abstract

We reinvestigate the case in which insurers have superior information regarding consumer's risk types, as studied by Villeneuve (2005, European Economic Review 49, 321-340). While Villeneuve produces interesting results on insurance contracts, the diverse outcomes make it difficult to pinpoint main implications. We make slight changes to the conditions in the Villeneuve's model by considering that there are a large number of insurers to ensure the competitive market; and that, in an equilibrium, contracts are required to be optimal even if some consumers are allowed to visit not all insurers announcing the same menus. We demonstrate that no pooling equilibrium can exist and that a separating equilibrium exists if and only if the difference between loss probabilities of types is large (types are distant). In a separating equilibrium, low risks are fully insured with actuarially fair premium, while high risks are self-insured. Our results provide a refinement of Villeneuve (2005), which is analogous to the monopoly case. This paper clarifies that high risk consumers bear information costs when insurers have superior information, in contrast with standard adverse selection models.

Keywords: adverse selection, informed insurer (principal), insurance markets

JEL Classification: G220, D820

Suggested Citation

Seog, S. Hun, On the Competition between Insurers with Superior Information (January 1, 2008). KAIST College of Business Working Paper Series No. 2008-004, Available at SSRN: https://ssrn.com/abstract=1085913 or http://dx.doi.org/10.2139/ssrn.1085913

S. Hun Seog (Contact Author)

Seoul National University - Business School ( email )

1 Gwanak-Ro, Gwanak-Gu
Seoul, 08826
Korea, Republic of (South Korea)

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