“Risk Classification in Insurance Markets with Risk and Preference Heterogeneity”
Coautoreado con Vitor Farinha Luz y Piero Gottardi
Abstract: We consider a competitive model of insurance provision where consumers are privately informed about their risk level and preferences. The presence of two-dimensional heterogeneity introduces novel distribution effects absent from the one-dimensional model typically studied in the literature. In this environment we investigate the welfare effects of the use of demographic characteristics in pricing (risk classification) and the effect of changes to the risk distribution. To this end we analyze the effects of the public release of a signal that is informative about individual risk and show that this improves welfare of all consumer types if, and only if the signal structure satisfies a monotonicity property. We also analyze the effects of changes in the risk distribution in the population and show that an increase in risk, according to the monotone likelihood ratio property (MLRP), leads to higher prices for all coverage levels and lower welfare for all consumer types, while increases in risk in the sense of first order stochastic dominance (FOSD) can be beneficial for some consumers.
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