Introducing Heterogeneity in the Rothschild-Stiglitz Model

Wambach, Achim

doi:10.2307/253851

Cited by 61 publications

(53 citation statements)

References 15 publications

(19 reference statements)

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“…An important area of applications for such models is health insurance, where moral hazard and adverse selection play a major role, see e.g. Geoffard et al (1998), Wambach (2000) and Mimra & Wambach (2010). But, in practice customers do not move from one insurer to a cheaper one as swiftly as economic models anticipate.…”

Section: Introductionmentioning

confidence: 99%

Competition among non-life insurers under solvency constraints: A game-theoretic approach

Dutang

Albrecher

Loisel

2013

European Journal of Operational Research

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Section: Introductionmentioning

confidence: 99%

Competition among non-life insurers under solvency constraints: A game-theoretic approach

Dutang

Albrecher

Loisel

2013

European Journal of Operational Research

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“…This also makes our problem different from that of Armstrong (1999) (one instrument and two common value characteristics). 14 In one-dimensional screening models, competition in menus has been considered by, for example, Miyazaki (1977) and Spence (1978) Wambach, 2000). Although Smart (2000) and Villeneuve (2003) consider the full set of types, they maintain the assumption that each company offers a single contract per risk class.…”

Section: Introductionmentioning

confidence: 99%

Multidimensional Screening in a Monopolistic Insurance Market

Olivella

Schroyen

2014

Geneva Risk Insur Rev

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We consider a population of individuals who differ in two dimensions, their risk type (expected loss) and their risk aversion, and solve for the profit-maximising menu of contracts that a monopolistic insurer puts out on the market. Our findings are threefold. First, it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, because women tend to be more risk averse than men (in that the risk aversion distribution for women first-order stochastically dominates that for men), gender discrimination may lead to a Pareto improvement. Introduction Individuals who seek insurance differ from each other in many respects. At least two of these differences are of central importance for insurance companies and for insurance market outcomes: the distribution of losses that insurance takers face, and their willingness to bear the risk of those losses. 1 Empirically, heterogeneity in the second characteristic is not negligible. For example, Aarbu and Schroyen 2 find that The Geneva Risk and Insurance Review, 2014, 39, (90-130) © 2014 The International Association for the Study of Insurance Economics 1554-964X/14 www.palgrave-journals.com/grir/ 1 A third factor, that will not be discussed here, is the moral stance of insurees, determining the amount of false claims that insurers have to deal with each year. 2 Aarbu and Schroyen (2014). the degree of relative risk aversion among Norwegians averages around 3.7 with a standard deviation of 2.1.Insurance market theory has primarily focused on the consequences of private information on the loss distribution, and to a lesser extent on the case in which information on risk aversion is private. The study of situations in which private information applies to both characteristics is much more scant. 3 Moreover, analysis of the two-dimensional private information problem has been restricted to competitive markets; that is, a setting in which several insurers compete for clients. In this paper, we study the opposite setting by asking how a monopolist would design a contract menu intended to attract agents who hold not only private information on their loss distribution, but also on their risk preferences.Our monopolistic set-up encompasses (admittedly, in an extreme way) the presence of market power in insurance markets. Several empirical studies have recently documented the presence of such market failure or of one of its causes: significant search and switching costs for different lines of insurance. Honka 4 estimates the average search cost in U.S. car insurance to lie between USD45 (online quote) and USD110 (offline quote), and the average switching cost at USD85. She argues that these costs may be an important cause for the high customer retention rates in that industry. In their study of a firm offering automobile insurance in Israel, Cohen and Einav 5 argue that the firm has mar...

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“…In another work, Wambach (2000) introduced unobservable wealth in addition to risk as characteristics of policyholders. In addition, de Meza and Webb (2001) and de Donder and Hindriks (2009) added privately known risk aversion into insurance models of moral hazard and asked if propitious selection may result.…”

Section: Introductionmentioning

confidence: 99%

Testing Adverse Selection with Two-Dimensional Information: Evidence from Singapore Auto Insurance Market

2011

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This article examines adverse selection in insurance markets within a two-dimensional information framework, where policyholders differ in both their riskiness and degree of risk aversion. Using this setup, we first build a theoretical model to make equilibrium predictions on competitive insurance screening. We study several variations on the pattern of information asymmetry. The outcomes range from full risk separation, to partial separation, to complete pooling of different risk types. Next, we examine results of this construction with an empirical investigation using a cross-sectional observation from a major automobile insurer in Singapore. To test for evidence of adverse selection, we propose a copula regression model to jointly examine the relationship between policyholders' coverage choice and accident occurrence. The association parameter in copula provides evidence of asymmetric information. Furthermore, we invoke the theory to identify subgroups of policyholders for whom one may expect the risk-coverage correlation and adverse selection to arise. The empirical findings are largely consistent with theoretical predictions.

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Introducing Heterogeneity in the Rothschild-Stiglitz Model

Cited by 61 publications

References 15 publications

Competition among non-life insurers under solvency constraints: A game-theoretic approach

Competition among non-life insurers under solvency constraints: A game-theoretic approach

Multidimensional Screening in a Monopolistic Insurance Market

Testing Adverse Selection with Two-Dimensional Information: Evidence from Singapore Auto Insurance Market

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