Demand elasticity, risk classification and loss coverage: when can community rating work?

Thomas, R.G. (2009) Demand elasticity, risk classification and loss coverage: when can community rating work? ASTIN Bulletin, 39 (2). pp. 403-428. ISSN 0515-0361 . (Full text available)

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http://dx.doi.org/10.2143/AST.39.2.2044641

Abstract

This paper investigates the effects of high or low fair-premium demand elasticity in an insurance market where risk classification is restricted. High fair-premium demand elasticity leads to a collapse in loss coverage, with an equilibrium premium close to the risk of the higher risk population. Low fair-premium demand elasticity leads to an equilibrium premium close to the risk of the lower risk population, and high loss coverage – possibly higher than under more complete risk classification. The elasticity parameters which are required to generate a collapse in coverage in the model in this paper appear higher than the values for demand elasticity which have been estimated in several empirical studies of various insurance markets. This offers a possible explanation of why some insurance markets appear to operate reasonably well under community rating, without the collapse in coverage which insurance folklore suggests.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Science Technology and Medical Studies > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: R.G. Thomas
Date Deposited: 07 Jul 2012 13:04
Last Modified: 30 Jan 2013 23:08
Resource URI: http://kar.kent.ac.uk/id/eprint/29802 (The current URI for this page, for reference purposes)
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