Time, Risk, Precommitment, and Adverse Selection in Competitive Insurance Markets

27 Pages Posted: 13 Nov 2003

See all articles by Mark V. Pauly

Mark V. Pauly

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Date Written: October 2003

Abstract

This informal paper explores models of competitive insurance market equilibrium when individuals of initially similar apparent risk experience divergence in risk levels over time. The information structure is modeled in three alternative ways: all insurers and insureds know risk at any point in time, current insurer and insured know risk, and only the individual knows risk. Insurers always know the average risk. It is shown that some models lead to "backloading" of premiums in which initial premiums are less than initial period expected expense, and that other models lead to "frontloading" of premiums and policy provisions of "guaranteed renewability." Finally, it is shown that guaranteed renewability greatly reduces the possibility of adverse selection.

JEL Classification: D8, G2

Suggested Citation

Pauly, Mark V., Time, Risk, Precommitment, and Adverse Selection in Competitive Insurance Markets (October 2003). CESifo Working Paper Series No. 1068, Available at SSRN: https://ssrn.com/abstract=466060

Mark V. Pauly (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

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National Bureau of Economic Research (NBER)

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