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Bundling and Insurance of Independent Risks

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Abstract

Risky prospects can often by disaggregated into several identifiable, smaller risks. In such cases, at least two modes of insurance are available: either (i) the disaggregated risks can be insured independently or (ii) the aggregate risk can be insured as one. We identify (ii) as risk bundling prior to insurance and (i) as separate, or unbundled, insurance. We investigate whether (i) or (ii) is preferable among consumers, insurers and the insurance market as a whole using numerical simulations. Our simulations reveal that separate contracts provide the socially optimal form of insurance when the insurer is able to charge the profit-maximising premia and has perfect information. Under asymmetric information with respect to consumers’ risk aversion, we find that separation is again the dominant method of insurance in terms of the market share it represents.

Suggested Citation

  • Benjamin Davies & Richard Watt, 2017. "Bundling and Insurance of Independent Risks," Working Papers in Economics 17/05, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:17/05
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/1705.pdf
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    References listed on IDEAS

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    1. Koehl, Pierre-Francois & Villeneuve, Bertrand, 2001. "Complementarity and Substituability in Multiple-Risk Insurance Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 245-266, February.
    2. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
    3. David S. Evans & Michael A. Salinger, 2008. "The Role Of Cost In Determining When Firms Offer Bundles," Journal of Industrial Economics, Wiley Blackwell, vol. 56(1), pages 143-168, March.
    4. repec:dau:papers:123456789/5355 is not listed on IDEAS
    5. Sheikhzadeh, Mehdi & Elahi, Ehsan, 2013. "Product bundling: Impacts of product heterogeneity and risk considerations," International Journal of Production Economics, Elsevier, vol. 144(1), pages 209-222.
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    More about this item

    Keywords

    Optimal insurance; risk bundling; simulation;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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