7. Asymmetric information

Question 1

Mitigating risk
* What is risk-sharing?
* What is risk -pooling?
* Why do people buy insurance?

Answer 1

Question 2

Answer 2

Question 3

State contigent income space with a lottery

Answer 3

Question 4

What are the points on the indifference curve on a state contigent income space?
Blank slide 11

Answer 4

Question 5

Gradient of indifference curve
MRS

Answer 5

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Question 6

Risk premium
* Certainity equivalent

Answer 6

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Question 7

What is the significance of Insurance

Answer 7

Question 8

Answer 8

Question 9

What happens to position when she buys insurance?

Answer 9

Question 10

• With the addition of a budget constraint
• What is the gradient of a budget constraint?

Answer 10

Question 11

Partial insurance diagram

Answer 11

Question 12

Full insurance

Answer 12

Question 13

What is the relationship between the price and the probability of loss and why

Answer 13

Question 14

What is the MRS equation?

Answer 14

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Question 15

What is the lottery for the person buying insurance and the insurance firm?

Answer 15

Question 16

What are the profits for the insurance firms?

Answer 16

Question 17

How do we measure the concentration in the UK insurance market?

Answer 17

Question 18

What is the indicator used to measure the variability of profits?

Answer 18

Question 19

What is the indicator used to measure the variability of profits?

Answer 19

Question 20

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

Answer 20

Question 21

State provided assurance

Answer 21

Question 22

Possible issues with the insurance market
* Credit constraints
* Non-diversifiable risk cannot be insured
* Adverse Selection
* Moral Hazard
* Behavioural factors

Answer 22

Question 23

The work of Rothschild and Stiglitz

Answer 23

Question 24

What is the state contingent graphs?

Answer 24

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Question 25

• Profits under perfect competition
• When is insurance markets is in a competitive equilibrium if:

Answer 25

Question 26

Answer 26

Question 27

Asymmetric information case: Two possible types of equilibria

Answer 27

Question 28

Asymmetric information case: Candidate pooling equilibrium
* Insurance profits
* Weighted average probability

Answer 28

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Question 29

Candidate pooling equilibrium: Average fair odds line

Answer 29

Question 30

Candidate pooling equilibrium diagram: What do high risk types prefer to their lottery

Answer 30

Question 31

Candidate pooling equilibrium diagram: What do low risk types prefer to their lottery?

Answer 31

Question 32

Candidate pooling equilibrium: What do both risk types prefer?

Answer 32

Question 33

Candidate pooling equilibrium:
* What happens at the equilibrium?
* What is a competitive equilibrium?

Answer 33

Question 34

Candidate pooling equilibrium:

Answer 34

Question 35

Candidate pooling equilibrium:

Answer 35

Question 36

Why can a pooling equilibrium not exist in a competitive insurance market?

Answer 36

Question 37

A pooling equilibrium: Car insurance example

Answer 37

Question 38

Seperating equilibrium: What if both high and low probability was offered and people select?

Answer 38

Question 39

Seperating equilibrium: What is the best policy in the candidate seperating equilibrium?

Answer 39

Question 40

What is the candidate Seperating equilibrium and full information case?
* Is it pareto efficient?

Answer 40

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Question 41

Answer 41

Question 42

Answer 42

Question 43

Answer 43

Question 44

What happens if λ is low and what if it is high?

Answer 44

Question 45

Solution to adverse-selection problem in health insurance

Answer 45

Question 46

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?

Answer 46

• Ensure gender equality in insurance pricing

Question 47

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?

Answer 47

• 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

Question 48

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.

Answer 48

• 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