Theoretical Foundations of Community Rating by a Private Monopolist Insurer: Framework, Regulation, and Numerical Analysis

Yann Braouezec and John Cagnol
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Yann Braouezec: IÉSEG School Of Management [Puteaux], LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

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Abstract: Community rating is a policy that mandates uniform premium regardless of the risk factors. In this paper, our focus narrows to the single contract interpretation wherein we establish a theoretical framework for community rating using Stiglitz's (1977) monopoly model in which there is a continuum of agents. We exhibit profitability conditions and show that, under mild regularity conditions, the optimal premium is unique and satisfies the inverse elasticity rule. Our numerical analysis, using realistic parameter values, reveals that under regulation, a 10% increase in indemnity is possible with minimal impact on other variables.

Keywords: Insurance; community rating; adverse selection; optimal contract; social welfare (search for similar items in EconPapers)
Date: 2024-01-04
Note: View the original document on HAL open archive server: https://hal.science/hal-04373063v1
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Working Paper: Theoretical Foundations of Community Rating by a Private Monopolist Insurer: Framework, Regulation, and Numerical Analysis (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04373063

DOI: 10.48550/arXiv.2309.15269

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