Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76545
Authors: 
Pauly, Mark V.
Year of Publication: 
2003
Series/Report no.: 
CESifo Working Paper 1068
Abstract: 
This informal paper explores models of competitive insurance market equilibrium when individuals of initially similar apparent risk experience divergence in risk levels over time. The information structure is modeled in three alternative ways: all insurers and insureds know risk at any point in time, current insurer and insured know risk, and only the individual knows risk. Insurers always know the average risk. It is shown that some models lead to “backloading” of premiums in which initial premiums are less than initial period expected expense, and that other models lead to “frontloading” of premiums and policy provisions of “guaranteed renewability.” Finally, it is shown that guaranteed renewability greatly reduces the possibility of adverse selection.
Document Type: 
Working Paper

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