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Insurer commitment and dynamic pricing pattern

  • Ruo Jia
  • Zenan Wu
Original Article
  • 1 Downloads

Abstract

A central issue in dynamic contracting is the type of inter-temporal pricing pattern. Some insurance products exhibit a highballing (front-loaded) pattern and others a lowballing (back-loaded) pattern, while still others are flat. We develop a unified competitive dynamic insurance model with asymmetric learning to investigate the impact of insurer commitment on the equilibrium inter-temporal pricing pattern. The model predicts that the equilibrium contract exhibits highballing under one-sided commitment and lowballing under no commitment. We then use a unique empirical setting of two products from one insurer, eliminating heterogeneity in firm, market, time horizon, and learning environment, to isolate the role of insurer commitment in determining the pricing pattern. Consistent with our theoretical predictions, we find that (i) the dynamic contracts exhibit a highballing pattern in loaner’s personal accident insurance, a one-sided commitment scenario, and (ii) a lowballing pattern in group critical illness insurance, a no-commitment scenario.

Keywords

Dynamic contract Commitment Asymmetric learning Information asymmetry Inter-temporal pricing 

JEL Classification

D86 G22 

Notes

Acknowledgements

The authors thank Christian Biener, Alexander Braun, Martin Brown, Richard Butler, Martin Eling, Roland Füss, Felix Irresberger, Andreas Landmann, Tore Nilssen, Joan Schmit, Ruilin Tian, and Wei Zheng, as well as participants in the 2016 ARIA and APRIA conferences, and the 2017 Risk Theory Society Annual Seminar for useful comments and discussions. We thank Shuyan Liu and Linsheng Zhuang for their assistance. We thank the financial support from National Natural Science Foundation of China (Nos. 71703003 and 71803003), and the seeds fund of School of Economics, Peking University. All remaining errors are our own.

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Copyright information

© International Association for the Study of Insurance Economics 2018

Authors and Affiliations

  1. 1.Department of Risk Management and Insurance, School of EconomicsPeking UniversityBeijingChina
  2. 2.Department of Economics, School of EconomicsPeking UniversityBeijingChina

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