Adverse Selection with Frequency and Severity Risk: Alternative Risk-Sharing Provisions

22 Pages Posted: 7 Nov 2008

See all articles by James A. Ligon

James A. Ligon

University of Alabama

Paul D. Thistle

University of Nevada, Las Vegas - Department of Finance

Abstract

The analysis considers an insurance market with adverse selection where individuals' loss distributions may differ with respect to both the frequency and severity of loss. We show that the combination of deductibles and coinsurance can be used to sort rationed policyholders. Because of their screening properties, coinsurance and deductibles may both be equilibrium forms of risk sharing for a particular insurer facing asymmetric information, with different rationed consumers choosing different risk-sharing provisions.

Suggested Citation

Ligon, James A. and Thistle, Paul D., Adverse Selection with Frequency and Severity Risk: Alternative Risk-Sharing Provisions. Journal of Risk & Insurance, Vol. 75, Issue 4, pp. 825-846, December 2008. Available at SSRN: https://ssrn.com/abstract=1296887 or http://dx.doi.org/10.1111/j.1539-6975.2008.00287.x

James A. Ligon (Contact Author)

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-6313 (Phone)
205-348-0590 (Fax)

Paul D. Thistle

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States
702-895-3856 (Phone)
702-895-4650 (Fax)

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