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When is utilitarian welfare higher under insurance risk pooling?

Chatterjee, Indradeb, Macdonald, Angus S., Tapadar, Pradip, Thomas, R. Guy (2021) When is utilitarian welfare higher under insurance risk pooling? Insurance: Mathematics and Economics, 101 (B). pp. 289-301. ISSN 0167-6687. (doi:10.1016/j.insmatheco.2021.08.006) (KAR id:88286)

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https://doi.org/10.1016/j.insmatheco.2021.08.006

Abstract

This paper considers the effect of bans on insurance risk classification on utilitarian social welfare. We consider two regimes: full risk classification, where insurers charge the actuarially fair premium for each risk, and pooling, where risk classification is banned and for institutional or regulatory reasons, insurers do not attempt to separate risk classes, but charge a common premium for all risks. For iso-elastic insurance demand, we derive sufficient conditions on higher and lower risks' demand elasticities which ensure that utilitarian social welfare is higher under pooling than under full risk classification. Using the concept of arc elasticity of demand, we extend the results to a form applicable to more general demand functions. Empirical evidence suggests that the required elasticity conditions for social welfare to be increased by a ban may be realistic for some insurance markets.

Item Type: Article
DOI/Identification number: 10.1016/j.insmatheco.2021.08.006
Uncontrolled keywords: Social welfare; Relative utilitarianism; Insurance risk classification; Insurance risk pooling; 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: 20 May 2021 21:09 UTC
Last Modified: 18 Nov 2021 19:04 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/88286 (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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