Deductible or Co-Insurance: Which Is the Better Insurance Contract Under Adverse Selection?

Topics:
Insurance
Tags:
Business Operations,
Strategy,
Risk,
Management,
Insurance Contract,
Insurance,
Financial Planning,
Finance,
Corporate Insurance,
Contract,
...
Source:
University of Zurich

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Overview: This paper contributes to the discussion on optimal insurance. It analyzes two basic forms of insurance contracts: A contract with a deductible and a contract imposing a positive co-insurance rate. Since high risks can always self-reveal themselves as high risks and buy the optimal insurance contract at high risks' premiums the Pareto-superior insurance contract is the one that leaves the low risks with higher expected utility while deterring high risks from joining the contract that is designed for low risks. The deductible contract turns out to be superior if premiums contain a sufficiently high loading.

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Format: PDF | Size: 387KB | Date: Oct 2004 | Pages: 24

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