Purchasing Term Life Insurance to Reach a Bequest Goal: Time-Dependent Case

We consider the problem of how an individual can use term life insurance to maximize the probability of reaching a given bequest goal, an important problem in financial planning. We assume that the individual buys instantaneous term life insurance with a premium payable continuously. We allow the force of mortality to vary with time, which, as we show, greatly complicates the problem.     

Welfare Effects of Banning Genetic Information in the Life Insurance Market: The Case of BRCA1/2 Genes

We investigate whether regulations that ban insurance companies from access to individuals' genetic tests are likely to lead to substantial adverse selection costs for the specific example of the so‐called breast cancer (BRCA1/2) genes. Using a data set including economic, demographic, and relevant family background information to simulate the market for 10‐year term life insurance, we find generally only modest adverse selection costs associated with such a regulatory ban. However, for family background groups that are at high risk for carrying one of these genes, the efficiency cost of adverse selection may be significant should the test become widely adopted.     

Mandatory Pensions and the Intensity of Adverse Selection in Life Insurance Markets

This article examines the impact of varying mandatory pensions on saving, life insurance, and annuity markets in an adverse selection economy. Under reasonable restrictions, we find unambiguous effects on market size, participation rates, and equilibrium prices. The degree of adverse selection, whether a market is active or inactive, and social welfare are analyzed.     

Competitive Insurance Markets and Adverse Selection in the Lab

We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterised version of the lemons’ model of Akerlof in the insurance context predicts total crowding-out of low risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz consists of adding a partial insurance contract so as to obtain self-selection of risks. We test the theoretical predictions of these two models in two experiments. A clean test is obtained by matching the parameters of these experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding-out of low risks in the first experiment. Crowding-out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. The latter can be sustained because insureds who objectively differ in their risk level do not perceive themselves as being so much different.     

Racial Differences in the Demand for Life Insurance

The objective of this article is to measure racial differences in the proportion of human capital that households protect with life insurance. Using the 2004 Survey of Consumer Finances data, racial differences in two stages of the process are tested, where it is assumed that households must decide both whether or not to purchase life insurance and how much of their human capital to insure (if they decide to purchase). Among married and cohabitating households, we find that, controlling for demographics and other factors, there is little difference in life insurance ownership between black and white households but that white households insure a larger proportion of their human capital than black households.     

逆向选择条件下带甄别期的最优保险设计

为了改善信息不对称对保险市场交易效率的影响,分投保人为两种及两种以上风险类型建立了带甄别期的保险契约模型,指出可以利用投保人在甄别期的风险发生情况来推断投保人的风险类型.带甄别期的保险契约是指:自保险合同生效之日起的一段时间内(甄别期),如果投保人发生风险,保险公司将给予一定的赔偿,甄别期过后,如果投保人再次发生风险,保险公司将不再给予任何赔偿;如果投保人在甄别期未发生风险,而在甄别期之后的剩余保险期发生风险,保险公司仍然给予与上述情况相同的赔偿.证明指出效用最优时带甄别期的保险契约不比R-S传统部分保险契约差,并给出了前者是后者严格帕累托改进的充分条件.此外,对于两种以上风险类型情形,证明了满足对次低风险投保人的激励相容约束是满足对其余高风险投保人激励相容约束的一个充分不必要条件,并给出了相应的充分条件,进一步指出该充分条件的集合恰是带甄别期的保险契约能够产生分离均衡的一个充分条件.最后,以一个算例说明确实存在效用最优时带甄别期的保险契约是R-S传统部分保险契约的严格帕累托改进情形.     

Adverse Selection and Competing Deposit Insurance Systems in Pre-Depression Texas

In 1910, Texas instituted a unique deposit insurance program for its state chartered banks by providing a choice between two separate plans: the depositors guaranty fund, similar to insurance schemes in several other states, and the depositors bond security system, which required the procurement of a privately issued guarantee of indemnity. While, under most deposit insurance schemes, the incentive to monitor the financial condition of individual banks simply devolves from depositors to regulators, the bond security system established in Texas distinguished itself by attempting to reintroduce market discipline through the indemnity requirement. Using a probit model with heteroscedasticity, we find evidence that the choice of insurance coverage led to risk-sorting among the banks, with relatively conservative and financially secure institutions opting for the comparatively rigorous bond security system. In addition, the bank failure record indicates the risk differentials between banks in the two plans persisted over time and even possibly grew, suggesting the bond security system at least partially avoided the moral hazard incentives associated with the fixed-rate depositors guaranty plan. These findings support the general view that market discipline is effective in banking.     

New Developments in the Theory of Adverse Selection in Competitive Insurance

We provide an overview of the paths taken to understand existence and efficiency of equilibrium in competitive insurance markets with adverse selection since the seminal work by Rothschild and Stiglitz (1976). A stream of recent work reconsiders the strategic foundations of competitive equilibrium by carefully modelling the market game.     

Understanding the Shift in Demand for Cash Value Life Insurance

Ownership of cash value life insurance in the United States has fallen in recent decades. Changes in age cohorts, family composition, and tax laws may have contributed to this decline. We identify factors that influence the demand for cash value life insurance and test whether they alone can explain the sharp decline in ownership. Demographic and tax code changes do not explain the decrease in permanent insurance. There is a consistent downward trend in demand from 1992 to 2010—particularly among middle‐age and younger households. The fewer households who own cash value policies are on average wealthier and more financially sophisticated, suggesting that permanent life insurance is increasingly being used as a tax shield rather than as a hedge against a loss in human capital.     

Background Risk and the Performance of Insurance Markets under Adverse Selection

Background risk can influence the performance of insurance markets that must deal with adverse selection when applicants are risk vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk. We show that background risk always results in a lower deductible for the incentive constrained contract, and that a broader range of markets attains the stable sequential equilibrium cross-subsidized pair of separating contracts. We conclude that background risk always improves the performance of markets for coverage against (insurable) foreground risks that must deal with adverse selection. We also find, however, that these improvements are never sufficient to offset the cost to insureds of bearing the background risk.     

An Examination of Adverse Selection in the Public Provision of Insurance

Using a unique data set from Florida's residual property insurer, we test for adverse selection in the public provision of homeowners’ insurance in Florida. We find a significant relationship between the losses and deductible choices of insureds in Florida's residual homeowners’ insurance market. This relationship provides strong evidence of the existence of an adverse selection problem in Florida's residual property insurance market. While this relationship is important to Florida regulators (and taxpayers) specifically, a finding of an adverse selection problem in residual markets in general has implications more broadly for government providers of insurance as an adverse selection problem in these settings will impact the public policy debates and decisions involving these markets.     

中国健康险市场逆向选择和正向选择并存现象的研究

本文以中国的健康险市场为例,考察不对称信息的影响。通过考察投保人投保金额以及附加险选择和索赔情况的相关关系,论文发现事后出现索赔的投保人,事前往往会选择购买附加险,但是投保金额却相对较低。结合理论模型分析,论文认为投保人在财富、风险偏好等方面的异质性以及信息不对称的存在是导致市场同时出现逆向选择和正向选择的主要原因。     

Cream Skimming: Innovations in Insurance Risk Classification and Adverse Selection

We demonstrate how innovations in insurance risk classification can lead to adverse selection, or cream skimming, against insurers that are slow to adopt such pricing innovations. Using a model in which insurers with insufficient pricing data cannot differentiate between low‐ and high‐risk policyholders and therefore charge both the same premium, we show how innovative insurers develop new risk classification data to identify overcharged low‐risk policyholders and attract them from rival insurers with reduced prices. Less innovative insurers thus insure a growing percentage of high‐risk customers, resulting in adverse selection attributable to their informational disadvantage. Next, we examine two cases in which “Big Data” innovations in risk classification led to concerns about cream skimming among U.S. auto insurers. First, we track the rapid adoption of credit‐based insurance scores as pricing variables in personal auto insurance markets. Second, we examine the growing popularity of usage‐based insurance programs like telematics, plans in which insurers use data on policyholders’ actual driving behavior to set prices that attract low‐risk customers. Issues associated with the execution of such pricing strategies are discussed. In both cases, we document how rival insurers quickly adopt successful innovations to reduce their exposure to adverse selection.     

Risk Aversion and the Willingness to Pay for Insurance: A Cautionary Discussion of Adverse Selection

Textbooks frequently describe adverse selection as an almost inevitable feature of insurance markets with heterogeneous buyers and asymmetric information. But if low-risk applicants are more risk averse than their high-risk counterparts, the former may be as willing or more willing than the latter to purchase insurance at any given price. The present article discusses this possibility in several forms suitable for different levels of instruction, to help bridge the gap between insurance education and current research on this topic.     

Pooling and Separating Equilibria in Insurance Markets with Adverse Selection and Distribution Costs

In the Rothschild-Stiglitz [1976] model of a competitive insurance market with adverse selection, pooling equilibria cannot exist. However in practice, pooling contracts are frequent, notably in health insurance and life insurance. This is due to the fact that distribution costs are nonnegligible and increase rapidly when more contracts are offered. We modify accordingly the Rothschild-Stiglitz model by introducing such distribution costs. We find that, however small these costs may be, they entail possible existence of pooling equilibria. Moreover, in these pooling equilibria, it is the high-risk individuals who are rationed, in the sense that they would be willing to buy more insurance at the current premium/insurance ratio.     

Equilibrium in Competitive Insurance Markets Under Adverse Selection and Yaari's Dual Theory of Risk

Under Yaari's dual theory of risk, we determine the equilibrium separating contracts for high and low risks in a competitive insurance market, in which risks are defined only by their expected losses, that is, a high risk is a risk that has a greater expected loss than a low risk. Also, we determine the pooling equilibrium contract when insurers are assumed non-myopic. Expected utility theory generally predicts that optimal insurance indemnity payments are nonlinear functions of the underlying loss due to the nonlinearity of agents' utility functions. Under Yaari's dual theory, we show that under mild technical conditions the indemnity payment is a piecewise linear function of the loss, a common property of insurance coverages.     

社会保险市场上的逆向选择与公共政策干预:国际研究动态述评

随着社会经济的进步与发展,提供社会保险日益成为现代政府的重要任务,而信息不对称带来的逆向选择这一市场失灵问题是政府提供社会保险的主要经济依据之一。由此,近年来国际学术界涌现出一大批关于社会保险市场上逆向选择与公共政策干预问题的研究文献,在将理论与数据相结合以分析公共政策的福利影响方面出现了很多研究进展。本文就尝试对这一领域的研究进行总结与分析,为国内学术研究的开展与公共经济政策的设计提供有益借鉴。     

Changes in Background Risk and the Demand for Insurance

The demand for insurance against loss from a particular risky asset is likely to depend on other risks the decision-maker faces. For independently distributed other risks, referred to as background risk, Eeckhoudt and Kimball [1992] determine the effect on insurance demand of introducing background risk. Recently, Eeckhoudt, Gollier, and Schlesinger [1996] determine conditions on preferences such that first- and second-degree stochastic deteriorations in background risk lead to a decrease in the decision-maker's willingness to accept other risks. These results, although formulated in a general decision model, also apply to insurance demand. This article continues analysis of this question by determining the effect on insurance demand of several other general changes in background risk.