When Is Utilitarian Welfare Higher Under Insurance Risk Pooling?

Indradeb Chatterjee (), Angus S. Macdonald, Pradip Tapadar and R. Guy Thomas ()
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Indradeb Chatterjee: University of Kent
Angus S. Macdonald: University of Kent
Pradip Tapadar: University of Kent
R. Guy Thomas: Heriot-Watt University

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2018, pp 219-223 from Springer

Abstract: Abstract This paper focuses on the effects of bans on insurance risk classification on utilitarian social welfare. We consider two regimes: full risk classification, where insurers charge the actuarially fair premium for each risk, and pooling, where risk classification is banned and for institutional or regulatory reasons, insurers do not attempt to separate risk classes, but charge a common premium for all risks. For the case of iso-elastic insurance demand, we derive sufficient conditions on higher and lower risks’ demand elasticities which ensure that utilitarian social welfare is higher under pooling than under full risk classification. Empirical evidence suggests that these conditions may be realistic for some insurance markets.

Keywords: Social welfare; Elasticity of demand; Risk pooling (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-319-89824-7_40

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DOI: 10.1007/978-3-319-89824-7_40

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