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The consequences for a monopolistic insurance firm of evaluating risk better than customers : The adverse selection hypothesis reversed

Villeneuve, Bertrand (2000), The consequences for a monopolistic insurance firm of evaluating risk better than customers : The adverse selection hypothesis reversed, The Geneva Risk and Insurance Review, 25, p. 65-79. http://dx.doi.org/10.1023/A:1008749524517

Type
Article accepté pour publication ou publié
Date
2000
Journal name
The Geneva Risk and Insurance Review
Volume
25
Publisher
Palgrave Macmillan
Pages
65-79
Publication identifier
Metadata
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Author(s)
Villeneuve, Bertrand cc
Abstract (EN)
This article models a situation in which a monopolistic insurer evaluates risk better than its customers. The resulting equilibrium allocations are compared to the consequences of the standard adverse selection hypothesis. On the positive side, they exhibit the property that low-risk people are better covered than higher-risk people. On the normative side, the article shows that there are two reasons for avoiding excessive risk classification: one is the classical destruction of insurance possibilities, and the other comes from the distrustful atmosphere generated by new asymmetric information.
Subjects / Keywords
asymmetric information; insurance markets; value of information; multidimensional signaling; informed principal
JEL
D82 - Asymmetric and Private Information; Mechanism Design
G22 - Insurance; Insurance Companies; Actuarial Studies