Prevention incentives in long‐term insurance contracts

Renaud Bourlès ()

Journal of Economics & Management Strategy, 2017, vol. 26, issue 3, 661-674

Abstract: Long‐term insurance contracts are widespread, particularly in public health and the labor market. Such contracts typically involve monthly or annual premia which are related to the insured's risk profile. A given profile may change, based on observed outcomes which depend on the insured's prevention efforts. The aim of this paper is to analyze the latter relationship. In a two‐period optimal insurance contract in which the insured's risk profile is partly governed by her effort on prevention, we find that both the insured's risk aversion and prudence play a crucial role. If absolute prudence is greater than twice absolute risk aversion, moral hazard justifies setting a higher premium in the first period but also greater premium discrimination in the second period. This result provides insights on the trade‐offs between long‐term insurance and the incentives arising from risk classification, as well as between inter‐ and intragenerational insurance.

Date: 2017
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Citations: View citations in EconPapers (2)

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https://doi.org/10.1111/jems.12196

Related works:
Working Paper: Prevention incentives in long-term insurance contracts (2017)
Working Paper: Prevention Incentives in Long-Term Insurance Contracts (2015)
Working Paper: Prevention Incentives in Long-Term Insurance Contracts (2015)
Working Paper: The incentive for prevention in public health Systems (2010)
Working Paper: MORAL HAZARD IN DYNAMIC INSURANCE CLASSIFICATION RISK AND PREPAYMENT (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:26:y:2017:i:3:p:661-674

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