Yes, No, Perhaps? Premium Risk and Guaranteed Renewable Insurance Contracts With Heterogeneous Incomplete Private Information

Yes, No, Perhaps? Premium Risk and Guaranteed Renewable Insurance Contracts With Heterogeneous Incomplete Private Information

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Article ID: iaor20162046
Volume: 83
Issue: 2
Start Page Number: 363
End Page Number: 385
Publication Date: Jun 2016
Journal: Journal of Risk and Insurance
Authors: , ,
Keywords: financial, information, marketing, risk, demand
Abstract:

The article shows that heterogeneous incomplete private information can explain the limited existence of guaranteed renewable health insurance (GR) contracts in an otherwise frictionless markets. We derive a unique equilibrium that can be of the form that either only a portion of the population or none will cover themselves against premium risk with a GR contract. Increased risk aversion, increased premium risk, and first‐order stochastic improvements of the distribution of private information increase the likelihood of positive take‐up. In case GR contracts are in demand, increased risk aversion and first‐order stochastic improvements of the distribution of private information lead to more individuals purchasing the GR contract.

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