Choice of purchasing arrangements in insurance markets

✍ Scribed by Kevin D. Cotter; Gail A. Jensen

• Publisher: Springer
• Year: 1989
• Tongue: English
• Weight: 647 KB
• Volume: 2
• Category: Article
• ISSN: 0895-5646
• DOI: 10.1007/bf00356864

✦ Synopsis

A simple dynamic model helps explain why risk-pooling purchasing arrangements evolved for health, disability, and term life insurance but not for property, automobile, or homeowners' insurance, and why whole-life policies typify life insurance purchased on an individual basis. We show that riskpooling purchases facilitate insurance against unpredictable changes in one's risk type, but such contracts prevail in competitive equilibrium only when the loss probabilities increase with age, as they do for health, disability, and life insurance. In contrast, when the loss probability declines with age (as it does for automobile insurance), then competitive equilibrium entails separating insurance contracts. *We thank Roger Feldman, James Peck, Richard Rogerson, and William White for useful comments. They are not responsible for any errors that remain.