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On the Possibility of Profitable Self‐Selection Contracts in Competitive Insurance Markets
Author(s) -
Snow Arthur
Publication year - 2009
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2009.01297.x
Subject(s) - adverse selection , rothschild , private information retrieval , microeconomics , profit (economics) , selection (genetic algorithm) , actuarial science , economics , insurance policy , business , auto insurance risk selection , key person insurance , computer science , computer security , archaeology , artificial intelligence , history
Several studies extend the Rothschild–Stiglitz model of competitive insurance contracting with adverse selection by incorporating additional dimensions of private information and conclude that some insurers may earn positive profit in a separating, self‐selection equilibrium, provided each insurer is restricted to making a single contract offer. The main result of this article is that these profitable configurations are not sustainable when individual insurers can offer multiple contracts. It is also shown that the ability to offer multiple contracts overturns equilibria that have applicants from different risk classes pooled as well as those where profits are dissipated by a fixed entry cost.