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Can Multi-Peril Insurance Policies Mitigate Adverse Selection?

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Listed:
  • Peter Zweifel

    (Department of Eonomics, University of Zurich, 8006 Zurich, Switzerland)

  • Annette Hofmann

    (Department of Finance, University of Cincinnati, Cincinnati, OH 45221, USA)

Abstract

The objective of this paper is to pursue an intuitive idea: for a consumer who represents an “unfavorable” health risk but an “excellent risk” as a driver, a multi-peril policy could be associated with a reduced selection effort on the part of the insurer. If this intuition should be confirmed, it will serve to address the decade-long concern with risk selection both in the economic literature and on the part of policy makers. As an illustrative example, a two-peril model is developed in which consumers deploy effort in search of a policy offering them maximum coverage at the current market price while insurers deploy effort designed to stave off unfavorable risks. Two types of Nash equilibria are compared: one in which the insurer is confronted with high-risk and low-risk types, and another one where both types are a “better risk” with regard to a second peril. The difference in the insurer’s selection effort directed at high-risk and low-risk types is indeed shown to be lower in the latter case, resulting in a mitigation of adverse selection.

Suggested Citation

  • Peter Zweifel & Annette Hofmann, 2024. "Can Multi-Peril Insurance Policies Mitigate Adverse Selection?," Risks, MDPI, vol. 12(6), pages 1-17, June.
  • Handle: RePEc:gam:jrisks:v:12:y:2024:i:6:p:102-:d:1418996
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    References listed on IDEAS

    as
    1. Keith J. Crocker & Arthur Snow, 2011. "Multidimensional Screening in Insurance Markets with Adverse Selection," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(2), pages 287-307, June.
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    3. Beck, Konstantin & Trottmann, Maria & Zweifel, Peter, 2010. "Risk adjustment in health insurance and its long-term effectiveness," Journal of Health Economics, Elsevier, vol. 29(4), pages 489-498, July.
    4. Ş. Nuray Akın & Brennan C. Platt, 2014. "Insurance, Consumer Search, and Equilibrium Price Distributions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(2), pages 397-429, June.
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