Optimal insurance with adverse selection and comonotonic background risk

Alary, David; Bien, Franck

Alary, David; Bien, Franck (2007), Optimal insurance with adverse selection and comonotonic background risk. https://basepub.dauphine.fr/handle/123456789/20300

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08.06.250.pdf (97.06Kb)

Type

Document de travail / Working paper

Date

2007

Titre de la collection

Document de travail LERNA

Numéro dans la collection

Ville d’édition

Toulouse

Métadonnées

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Auteur(s)

Alary, David
Laboratoire d'Economie des ressources Naturelles [LERNA]
Bien, Franck
Laboratoire d'Economie de Dauphine [LEDa]

Résumé (EN)

In this note, we consider an adverse selection problem involving an insurance market à la Rothschild-Stiglitz. We assume that part of the loss is uninsurable as in the case with health care or environmental risk. We characterize sufficient conditions such that adverse selection by itself does not distort competitive insurance contracts. A sufficiently large uninsurable loss provides an incentive to high-risk policy holders not to mimic low-risk policy holders without distorting the optimal coverage.