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Equilibrium in Insurance Markets With Adverse Selection When Insurers Pay Policy Dividends
Author(s) -
Picard Pierre
Publication year - 2019
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.12243
Subject(s) - adverse selection , economics , dividend , insurance policy , rothschild , stock (firearms) , microeconomics , actuarial science , finance , mechanical engineering , archaeology , engineering , history
Abstract We show that an equilibrium always exists in the Rothschild–Stiglitz insurance market model with adverse selection and an arbitrary number of risk types, when insurance contracts include policy dividend rules. The Miyazaki–Wilson–Spence state‐contingent allocation is an equilibrium allocation (defined as a set of type‐dependent lotteries sustained at a symmetric equilibrium of a market game), and it is the only one when out‐of‐equilibrium beliefs satisfy a robustness criterion. It is shown that stock insurers and mutuals may coexist, with stock insurers offering insurance coverage at actuarial price and mutuals cross‐subsidizing risks.