7. Asymmetric information Flashcards
Mitigating risk
* What is risk-sharing?
* What is risk -pooling?
* Why do people buy insurance?
State contigent income space with a lottery
What are the points on the indifference curve on a state contigent income space?
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Gradient of indifference curve
MRS
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Risk premium
* Certainity equivalent
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What is the significance of Insurance
What happens to position when she buys insurance?
- With the addition of a budget constraint
- What is the gradient of a budget constraint?
Partial insurance diagram
Full insurance
What is the relationship between the price and the probability of loss and why
What is the MRS equation?
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What is the lottery for the person buying insurance and the insurance firm?
What are the profits for the insurance firms?
How do we measure the concentration in the UK insurance market?
What is the indicator used to measure the variability of profits?
What is the indicator used to measure the variability of profits?
What determines the competiitveness of the insurance market?
* Increase in concentration
* Scale and diversification of risk
* Many competitors
* Fierce competition for new business
* Price walking
State provided assurance
Possible issues with the insurance market
* Credit constraints
* Non-diversifiable risk cannot be insured
* Adverse Selection
* Moral Hazard
* Behavioural factors
The work of Rothschild and Stiglitz
What is the state contingent graphs?
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- Profits under perfect competition
- When is insurance markets is in a competitive equilibrium if:
Asymmetric information case: Two possible types of equilibria
Asymmetric information case: Candidate pooling equilibrium
* Insurance profits
* Weighted average probability
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Candidate pooling equilibrium: Average fair odds line
Candidate pooling equilibrium diagram: What do high risk types prefer to their lottery
Candidate pooling equilibrium diagram: What do low risk types prefer to their lottery?
Candidate pooling equilibrium: What do both risk types prefer?
Candidate pooling equilibrium:
* What happens at the equilibrium?
* What is a competitive equilibrium?
Candidate pooling equilibrium:
Candidate pooling equilibrium:
Why can a pooling equilibrium not exist in a competitive insurance market?
A pooling equilibrium: Car insurance example
Seperating equilibrium: What if both high and low probability was offered and people select?
Seperating equilibrium: What is the best policy in the candidate seperating equilibrium?
What is the candidate Seperating equilibrium and full information case?
* Is it pareto efficient?
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What happens if λ is low and what if it is high?
Solution to adverse-selection problem in health insurance
Schmeiser, Stormer and Wagner (2014)
What was the main reason for differentials in insurance premia between men and women before the ECJ banned pricing differences on the basis of gender?
- Ensure gender equality in insurance pricing
Schmeiser, Stormer and Wagner (2014)
If men and woman are required to pay the same premium (controlling for factors other than gender) despite different risk levels, what would we expect to happen to demand for insurance by the high-risk and by the low-risk gender in a given insurance market?
- Impact markets with low price inelasticity
- Subsidising policyholder will no longer take out insurance policies at all and the only people left will be the high risk people who will adjust the price to the high price level.
- Moral hazrad: Excessive risks may be taken
Schmeiser, Stormer and Wagner (2014)
How do the authors anticipate insurance companies would respond to the ban on gender-based discrimination? Give a few examples.
- Withdrawal of competitors from less profitable product lines. Subsitute products may become more attractive
- Self-insurance or mutual investment funds for retirement arrangements may be preferred
- Market may decrease in size along with quality of the insurance benefits
- Cross subsidisation from high-risk to low-risk
- Insurers may target customers (E.g. Gender-specific sales campaigns and criteria that is correlated with gender (E.g. Size of motor))
- Other factors that are independent of gender may be used (E.g. Length of customer driving experience, vehicle saftey measures )
- Higher comission to staff who acquire low risk gender
