Premium
Yes, No, Perhaps? Premium Risk and Guaranteed Renewable Insurance Contracts With Heterogeneous Incomplete Private Information
Author(s) -
Peter Richard,
Richter Andreas,
Steinorth Petra
Publication year - 2016
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.12064
Subject(s) - private information retrieval , risk aversion (psychology) , order (exchange) , purchasing , insurance policy , actuarial science , risk premium , economics , population , auto insurance risk selection , microeconomics , expected utility hypothesis , business , econometrics , financial economics , casualty insurance , finance , statistics , operations management , demography , mathematics , sociology
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.