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A Note on Loadings and Deductibles: Can a Vicious Circle Arise?

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  • Elisa Luciano

Abstract

In a recently reprinted paper Borch wonders whether an increase in insurance loadings, together with the consequent increase in customers' deductibles, may be the start of a vicious circle, in which higher deductibles produce higher loadings and vice versa, ad infinitum. This paper rules out the possibility of a vicious circle, in a model à la Borch. First of all, increases in costs of the type considered by Borch are not necessarily followed by increases in loadings. Second, increases in loadings are not necessarily followed by increases in deductibles, since in equilibrium insurance may be Giffen. Last but not least, loadings do not increase with deductibles, because the only viable equilibrium is a Stackelberg one.

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  • Elisa Luciano, 1999. "A Note on Loadings and Deductibles: Can a Vicious Circle Arise?," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 1999(2), pages 157-169.
    • Handle: RePEc:taf:sactxx:v:1999:y:1999:i:2:p:157-169
    DOI: 10.1080/03461239950132633
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    References listed on IDEAS

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    1. Dionne, Georges & Eeckhoudt, Louis, 1984. "Insurance and saving: some further results," Insurance: Mathematics and Economics, Elsevier, vol. 3(2), pages 101-110, April.
    2. Borch, Karl, 1975. "Optimal Insurance Arrangements," ASTIN Bulletin, Cambridge University Press, vol. 8(3), pages 284-290, September.
    3. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," LIDAM Reprints CORE 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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