Yes, No, Perhaps? - Premium Risk and Guaranteed Renewable Insurance Contracts with Heterogeneous Incomplete Private Information
Journal of Risk and Insurance, Vol. 83, No. 2, 2016
Posted: 21 Dec 2011 Last revised: 21 Jan 2017
Date Written: 2016
The article shows that heterogeneous incomplete private information can explain the limited existence of guaranteed renewable health insurance (GR) contracts in an otherwise frictionless markets. We derive a unique equilibrium that can be of the form that either only a portion of the population or none will cover themselves against premium risk with a GR contract. Increased risk aversion, increased premium risk, and first-order stochastic improvements of the distribution of private information increase the likelihood of positive take-up. In case GR contracts are in demand, increased risk aversion and first-order stochastic improvements of the distribution of private information lead to more individuals purchasing the GR contract.
Keywords: risk classification, insurance economics, private information
JEL Classification: D11, D42, D82, G22
Suggested Citation: Suggested Citation