Prevention Incentives in Long-Term Insurance Contracts

Renaud Bourlès ()

Working Papers from HAL

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, where a given profile might 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 the effort he puts 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. For specific utility functions, moreover, an increase in the gap between prudence and risk aversion increases the initial premium and the subsequent premium discrimination. These results provide insights on the tradeoffs between long-term insurance and the incentives for primary prevention arising from risk classification, as well as between inter- and intra-generational insurance.

Keywords: long-term insurance; classification risk; moral hazard; prudence (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-cta, nep-hea, nep-ias and nep-upt
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01214592v1
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Related works:
Journal Article: Prevention incentives in long‐term insurance contracts (2017)
Working Paper: Prevention incentives in long-term insurance contracts (2017)
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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