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Theoretical Foundations of Community Rating by a Private Monopolist Insurer: Framework, Regulation, and Numerical Analysis

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  • Yann Braouezec

    (IÉSEG School Of Management [Puteaux], LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • John Cagnol

    (CentraleSupélec, Fédération de Mathématiques de CentraleSupélec - CentraleSupélec - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique, Université Paris-Saclay)

Abstract

Community rating is a policy that mandates uniform premium regardless of the risk factors. In this paper, our focus narrows to the single contract interpretation wherein we establish a theoretical framework for community rating using Stiglitz's (1977) monopoly model in which there is a continuum of agents. We exhibit profitability conditions and show that, under mild regularity conditions, the optimal premium is unique and satisfies the inverse elasticity rule. Our numerical analysis, using realistic parameter values, reveals that under regulation, a 10% increase in indemnity is possible with minimal impact on other variables.

Suggested Citation

  • Yann Braouezec & John Cagnol, 2024. "Theoretical Foundations of Community Rating by a Private Monopolist Insurer: Framework, Regulation, and Numerical Analysis," Working Papers hal-04373063, HAL.
    • Handle: RePEc:hal:wpaper:hal-04373063
    DOI: 10.48550/arXiv.2309.15269
    Note: View the original document on HAL open archive server: https://hal.science/hal-04373063v1
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