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Insurance Loss Coverage Under Restricted Risk Classification: The Case Of Iso-Elastic Demand

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  • Hao, MingJie
  • Macdonald, Angus S.
  • Tapadar, Pradip
  • Thomas, R. Guy

Abstract

This paper investigates equilibrium in an insurance market where risk classification is restricted. Insurance demand is characterised by an iso-elastic function with a single elasticity parameter. We characterise the equilibrium by three quantities: equilibrium premium; level of adverse selection (in the economist's sense); and “loss coverage”, defined as the expected population losses compensated by insurance. We consider both equal elasticities for high and low risk-groups, and then different elasticities. In the equal elasticities case, adverse selection is always higher under pooling than under risk-differentiated premiums, while loss coverage first increases and then decreases with demand elasticity. We argue that loss coverage represents the efficacy of insurance for the whole population; and therefore that if demand elasticity is sufficiently low, adverse selection is not always a bad thing.

Suggested Citation

  • Hao, MingJie & Macdonald, Angus S. & Tapadar, Pradip & Thomas, R. Guy, 2016. "Insurance Loss Coverage Under Restricted Risk Classification: The Case Of Iso-Elastic Demand," ASTIN Bulletin, Cambridge University Press, vol. 46(2), pages 265-291, May.
  • Handle: RePEc:cup:astinb:v:46:y:2016:i:02:p:265-291_00
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    Cited by:

    1. Zhang, Bangbang & Li, Jiaxiang & Tian, Wenmiao & Chen, Haibin & Kong, Xiangbin & Chen, Wei & Zhao, Minjuan & Xia, Xianli, 2020. "Spatio-temporal variances and risk evaluation of land finance in China at the provincial level from 1998 to 2017," Land Use Policy, Elsevier, vol. 99(C).
    2. Hao, MingJie & Macdonald, Angus S. & Tapadar, Pradip & Thomas, R. Guy, 2018. "Insurance loss coverage and demand elasticities," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 15-25.
    3. Chatterjee, Indradeb & Hao, MingJie & Tapadar, Pradip & Thomas, R. Guy, 2024. "Can price collars increase insurance loss coverage?," Insurance: Mathematics and Economics, Elsevier, vol. 116(C), pages 74-94.

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