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Transparency aversion and insurance market equilibria

Irina Gemmo, Mark J. Browne and Helmut Gründl

No 25/17, ICIR Working Paper Series from Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)

Abstract: Telemonitoring devices can be used to screen consumers' characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. However, some consumers value their privacy and dislike sharing private information with insurers. In the second-best efficient Wilson-Miyazaki-Spence framework, we allow for consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as utilitarian social welfare. Our analysis shows that the choice of information disclosure with respect to revelation of their risk type can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare and a Pareto efficient market allocation. However, if all consumers are offered cross-subsidizing contracts, the introduction of a transparency contract decreases or even eliminates cross-subsidies. Given the prior existence of a WMS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis provides a theoretical foundation for the discussion on consumer protection in the context of digitalization. It shows that new technologies bring new ways to challenge crosssubsidization in insurance markets and stresses the negative externalities that digitalization has on consumers who are not willing to take part in this development.

Keywords: Adverse Selection; Digitalization; Privacy; Screening; Transparency Aversion (search for similar items in EconPapers)
JEL-codes: D41 D52 D60 D82 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-ias, nep-mic and nep-upt
Date: 2017
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