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Separation Without Exclusion in Financial Insurance
Author(s) -
Stephens Eric,
Thompson James R.
Publication year - 2015
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/jori.12038
Subject(s) - actuarial science , separation (statistics) , default risk , business , auto insurance risk selection , insurance policy , uncorrelated , financial risk , sort , economics , general insurance , credit risk , statistics , computer science , mathematics , information retrieval
Abstract This article develops a model of linearly priced financial insurance sold by default‐prone insurers. It shows that when insurers differ in their default probabilities there can exist equilibria in which different risk types partially or completely self‐sort into insurance contracts offered by different insurers. Partial separation can occur when insurer default and insurance risks are uncorrelated. Full separation is possible when they are correlated. For example, low‐risk insured parties may match with higher default‐risk insurers, while high‐risk insured parties match with lower default‐risk insurers.