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Adverse Selection in Insurance Markets

  • Chapter
Handbook of Insurance

Abstract

In this survey we present some of the more significant results in the literature on adverse selection in insurance markets. Sections 7.1 and 7.2 introduce the subject and section 7.3 discusses the monopoly model developed by Stiglitz (1977) for the case of single-period contracts and extended by many authors to the multi-period case. The introduction of multi-period contracts raises many issues that are discussed in detail: time horizon, discounting, commitment of the parties, contract renegotiation and accidents underreporting. Section 7.4 covers the literature on competitive contracts. The analysis becomes more complicated since insurance companies must take into account competitive pressures when they set incentives contracts. As pointed out by Rothschild and Stiglitz (1976), there is not necessarily a Cournot-Nash equilibrium in presence of adverse selection. However, market equilibrium can be sustained when principals anticipate competitive reactions to their behaviour or when they adopt strategies that differ from the pure Nash strategy. Multi-period contracting is discussed. We show that different predictions on the evolution of insurer profits over time can be obtained from different assumptions concerning the sharing of information between insurers about individual’s choice of contracts and accidents experience. The roles of commitment and renegotiation between the parties to the contract are important. Section 7.5 introduces models that consider moral hazard and adverse selection simultane-ously and section 7.6 treats adverse selection when people can choose their risk status. Section 7.7 discusses many extensions to the basic models such as risk categorization, different risk aversion, symmetric imperfect information, multiple risks, principals more informed than agents and uberrima fides.

CRSH (Canada), FCAR (Québec) and FFSA (France) provided financial support to this study. Comments on an earlier version by K.J. Crocker, I. Cromb, B. Dahlby, C. Fluet, T. Nilssen, D.A. Malueg and P. Viala were very useful. We wish to thank Claire Boisvert for her valuable assistance in the preparation of the manuscript.

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Author information

Authors and Affiliations

  1. HEC-Montreal, Canada

    Georges Dionne

  2. University of Pennsylvania, USA

    Neil Doherty

  3. Université Paris X-Nanterre, France

    Nathalie Fombaron

Authors
  1. Georges Dionne
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  2. Neil Doherty
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  3. Nathalie Fombaron
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Editor information

Editors and Affiliations

  1. HEC-Montréal, Canada

    Georges Dionne (Risk Management Chair) (Risk Management Chair)

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© 2000 Springer Science+Business Media New York

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Dionne, G., Doherty, N., Fombaron, N. (2000). Adverse Selection in Insurance Markets. In: Dionne, G. (eds) Handbook of Insurance. Huebner International Series on Risk, Insurance, and Economic Security, vol 22. Springer, Dordrecht. https://doi.org/10.1007/978-94-010-0642-2_7

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  • DOI: https://doi.org/10.1007/978-94-010-0642-2_7

  • Publisher Name: Springer, Dordrecht

  • Print ISBN: 978-0-7923-7911-9

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