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Equilibrium in Insurance Markets With Adverse Selection When Insurers Pay Policy Dividends

Pierre Picard

Journal of Risk & Insurance, 2019, vol. 86, issue 4, 887-914

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.

Date: 2019
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https://doi.org/10.1111/jori.12243

Related works:
Working Paper: Equilibrium in insurance markets with adverse selection when insurers pay policy dividends (2016) Downloads
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