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Insurance loss coverage and demand elasticities

Hao, MingJie, Macdonald, Angus S., Tapadar, Pradip, Thomas, R. Guy (2018) Insurance loss coverage and demand elasticities. Insurance: Mathematics and Economics, 79 . pp. 15-25. ISSN 0167-6687. (doi:10.1016/j.insmatheco.2017.12.002) (KAR id:59795)

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https://doi.org/10.1016/j.insmatheco.2017.12.002

Abstract

Restrictions on insurance risk classification may induce adverse selection, which is usually perceived as a bad outcome. We suggest a counter-argument to this perception in circumstances where modest levels of adverse selection lead to an increase in `loss coverage', defined as expected losses compensated by insurance for the whole population. This happens if the shift in coverage towards higher risks under adverse selection more than offsets the fall in number of individuals insured. The possibility of this outcome depends on insurance demand elasticities for higher and lower risks. We state elasticity conditions which ensure that for any downward-sloping insurance demand functions, loss coverage when all risks are pooled at a common price is higher than under fully risk-differentiated prices. Empirical evidence suggests that these conditions may be realistic for some insurance markets.

Item Type: Article
DOI/Identification number: 10.1016/j.insmatheco.2017.12.002
Uncontrolled keywords: Adverse selection; loss coverage; elasticity of demand; arc elasticity of 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: 05 Jan 2017 15:07 UTC
Last Modified: 16 Feb 2021 13:41 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/59795 (The current URI for this page, for reference purposes)
Tapadar, Pradip: https://orcid.org/0000-0003-0435-0860
Thomas, R. Guy: https://orcid.org/0000-0003-4745-5849
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