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Insurer commitment and dynamic pricing pattern

Ruo Jia () and Zenan Wu ()
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Ruo Jia: Peking University
Zenan Wu: Peking University

The Geneva Risk and Insurance Review, 2019, vol. 44, issue 1, 87-135

Abstract: Abstract A central issue in dynamic contracting is the type of inter-temporal pricing pattern. Some insurance products exhibit a highballing (front-loaded) pattern and others a lowballing (back-loaded) pattern, while still others are flat. We develop a unified competitive dynamic insurance model with asymmetric learning to investigate the impact of insurer commitment on the equilibrium inter-temporal pricing pattern. The model predicts that the equilibrium contract exhibits highballing under one-sided commitment and lowballing under no commitment. We then use a unique empirical setting of two products from one insurer, eliminating heterogeneity in firm, market, time horizon, and learning environment, to isolate the role of insurer commitment in determining the pricing pattern. Consistent with our theoretical predictions, we find that (i) the dynamic contracts exhibit a highballing pattern in loaner’s personal accident insurance, a one-sided commitment scenario, and (ii) a lowballing pattern in group critical illness insurance, a no-commitment scenario.

Keywords: Dynamic contract; Commitment; Asymmetric learning; Information asymmetry; Inter-temporal pricing (search for similar items in EconPapers)
JEL-codes: D86 G22 (search for similar items in EconPapers)
Date: 2019
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