Insurance loss coverage under restricted risk classification: The case of iso-elastic demand

Hao, MingJie and Macdonald, Angus S. and Tapadar, Pradip and 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:https://doi.org/10.1017/asb.2016.6) (Full text available)

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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
Uncontrolled keywords: Adverse selection, loss coverage, risk classification, equilibrium premium, iso-elastic demand.
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: Pradip Tapadar
Date Deposited: 17 Feb 2016 16:33 UTC
Last Modified: 17 Jan 2017 11:58 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/54231 (The current URI for this page, for reference purposes)
Tapadar, Pradip: https://orcid.org/0000-0003-0435-0860
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