Abstract
I examine competition in the sector of mortgage life insurance, in particular the periodic switching right (PSR), by which the borrower can change his insurer once every period (say, every year). The PSR is likely to have pro competitive effects (lower premium), but by the same move, to lead to excessive segmentation. The main theoretical prediction of the PSR is that, in equilibrium, everyone will pay every year a premium reflecting his current risk, meaning that the risk of future risk evolution is not covered. This destruction of insurance is appreciated negatively by consumers. The trade-off is between, on the one hand, a lower price for insurance, and on the other hand, a lower quality of insurance. I simulate the cost of the PSR and find about 5–15 % of the total insurance cost. This order of magnitude is slightly smaller than the benefit one can expect from increased competition. All in all, a switching right limited in time would bring the benefits of competition and avoid most of the cost of segmentation.
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Notes
We can compare these fees with those found in another line of insurance, which is technically more complex, and costlier to provide and monitor: health insurance. Karaca-Mandic et al. [14] find a rate of about 35 % for small groups of less than 100 workers; and much less for firms with larger groups of covered workers.
A rich survey on adverse selection is [10].
Even if they are not legally compulsory, commercially they are a condition to get a loan.
Bolton and Dewatripont [4] for a complete synthesis on contract theory, and the effect of commitment to reach the ex ante and ex post efficient solutions.
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Acknowledgments
This study has been partly supported by the Ministére de l’Économie et des finances (France). I thank Damien Ientile and Olivier Taillardat for information and analysis. I also thank CÉline Grislain-LetrÉmy and the referee for valuable suggestions. I am solely responsible for the opinions expressed in the text.
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Villeneuve, B. Mortgage life insurance: a rationale for a time limit in switching rights. Math Finan Econ 8, 473–487 (2014). https://doi.org/10.1007/s11579-014-0124-2
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DOI: https://doi.org/10.1007/s11579-014-0124-2