Hao, MingJie, Macdonald, Angus S., Tapadar, Pradip, Thomas, R. Guy (2016) Insurance loss coverage under restricted risk classification: The case of iso-elastic demand. ASTIN Bulletin, 46 (2). pp. 265-291. ISSN 0515-0361. E-ISSN 1783-1350. (doi:10.1017/asb.2016.6) (KAR id:54231)
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Official URL: http://dx.doi.org/10.1017/asb.2016.6 |
Abstract
This paper investigates equilibrium in an insurance market where risk classification is restricted. Insurance demand is characterised by an iso-elastic function with a single elasticity parameter. We characterise the equilibrium by three quantities: equilibrium premium; level of adverse selection (in the economist’s sense); and “loss coverage”, defined as the expected population losses compensated by insurance. We consider both equal elasticities for high and low risk-groups, and then different elasticities. In the equal elasticities case, adverse selection is always higher under pooling than under risk-differentiated premiums, while loss coverage first increases and then decreases with demand elasticity. We argue that loss coverage represents the efficacy of insurance for the whole population; and therefore that if demand elasticity is sufficiently low, adverse selection is not always a bad thing.
Item Type: | Article |
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DOI/Identification number: | 10.1017/asb.2016.6 |
Uncontrolled keywords: | Adverse selection, loss coverage, risk classification, equilibrium premium, iso-elastic demand. |
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: | 17 Feb 2016 16:33 UTC |
Last Modified: | 05 Nov 2024 10:41 UTC |
Resource URI: | https://kar.kent.ac.uk/id/eprint/54231 (The current URI for this page, for reference purposes) |
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