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Research of two‐period insurance contract model with a low compensation period under adverse selection
Author(s) -
Ma Benjiang,
Ye Jingyu,
Huang Yuanji,
Bashir Muhammad Farhan
Publication year - 2020
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3100
Subject(s) - adverse selection , compensation (psychology) , period (music) , actuarial science , insurance policy , principal (computer security) , selection (genetic algorithm) , pareto principle , business , auto insurance risk selection , key person insurance , economics , operations management , computer science , computer security , psychology , physics , artificial intelligence , acoustics , psychoanalysis
The phenomenon of adverse selection caused by asymmetric information dominates the insurance market. In this paper, based on principal‐agent theory, we establish a two‐period dynamic insurance contract model with a low compensation period. This model introduces the tools of a low compensation period and the increase and decrease in the bonus to identify the risk types of policyholders. We prove that this model can achieve a strict Pareto improvement relative to the two‐period static insurance contract model with a low compensation period. Moreover, we also graphically analyze the conclusion, which can help insurance companies to design more comprehensive insurance contracts.