Skip to main content
Kent Academic Repository

Can price collars increase insurance loss coverage?

Chatterjee, Indradeb, Hao, MingJie, Tapadar, Pradip, Thomas, R. Guy (2024) Can price collars increase insurance loss coverage? Insurance: Mathematics and Economics, 116 (2024). pp. 74-94. ISSN 0167-6687. (doi:10.1016/j.insmatheco.2024.02.003) (KAR id:100161)

Abstract

Loss coverage, defined as expected population losses compensated by insurance, is a public policy criterion for comparing different risk classification regimes. Using a model with two risk-groups (high and low) and iso-elastic demand, we compare loss coverage under three alternative regulatory regimes: (i) full risk-classification (ii) pooling (iii) a price collar, whereby each insurer is permitted to set any premiums, subject to a maximum ratio of its highest and lowest prices for different risks. Outcomes depend on the comparative demand elasticities of low and high risks. If low-risk elasticity is sufficiently low compared with high-risk elasticity, pooling is optimal; and if it is sufficiently high, full risk classification is optimal. For an intermediate region where the elasticities are not too far apart, a price collar is optimal, but only if both elasticities are greater than one. We give extensions of these results for more than two risk-groups. We also outline how they can be applied to other demand functions using the construct of arc elasticity.

Item Type: Article
DOI/Identification number: 10.1016/j.insmatheco.2024.02.003
Uncontrolled keywords: Insurance loss coverage, risk classification, price collar, demand elasticity, marginal revenue-to-cost ratio, arc elasticity, partial community rating.
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Depositing User: Pradip Tapadar
Date Deposited: 21 Feb 2023 16:40 UTC
Last Modified: 23 Feb 2024 09:24 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/100161 (The current URI for this page, for reference purposes)

University of Kent Author Information

Chatterjee, Indradeb.

Creator's ORCID:
CReDIT Contributor Roles:

Hao, MingJie.

Creator's ORCID:
CReDIT Contributor Roles:

Tapadar, Pradip.

Creator's ORCID: https://orcid.org/0000-0003-0435-0860
CReDIT Contributor Roles:

Thomas, R. Guy.

Creator's ORCID: https://orcid.org/0000-0003-4745-5849
CReDIT Contributor Roles:
  • Depositors only (login required):

Total unique views for this document in KAR since July 2020. For more details click on the image.