Insurance Flashcards
Social Insurance is…
the one provided by public organisations which is compulsory for everyone
Private Insurance is…
insurance provided by private companies which is not compulsory for individuals
How do insurances calculate premiums?
total value of insurance /
total number of insurance holders
Actuarial Insurance…
is the price of insurance (premiums) reflecting the expected risks
How is actuarial insurance calculated?
Premium = Probability of loss x Value of insured
Adverse Selection
hidden information before engaging with the insurance company
Adverse Selection & profile risks
high profile risks will pay a lower premium than those with lower risks.
low risk profile will go out the market (no insurance) leading a high risk group in the market
solutions for adverse selection
cream skimming, however, because people are chosen it will lead to a reduced group and an inefficient social optimum
Moral Hazard
hidden information after engaging with the insurance company
moral hazard challenges insurance companies face
little information and trust on the insured thus difficult to determine how the accident happened
solutions for moral hazard (3)
- maximum period of insurance
- increasing premium after the accident
- insured having to cover a part of the accident
why moral hazard & adverse selection happen?
due to information asymmetries.
leads to underprovided insurance
what does it mean to have a market of lemons?
it means to have an unobservable quality of what is happening and thus a fake reality (adverse selection situations; better than it seems)
market insurance failures due to (4)
- information asymmetries (moral hazard & adverse selection)
- bounded rationality (inadequate demand for insurance)
- bounded willpower (insufficient demand for insurance)
- calculating premiums (independent risks & (un)certainties)
1&4 happen because insurance markets aren’t properly provided, missing
what is risk solidarity in the insurance market?
it aims to break the link between profiles and risks thus making the insurance market more efficient and equitable by redistributing risks collectively
if all conditions of 1st best world would be fulfilled, actuarial insurance would reflect…
all individuals’ premium risks
how does social insurance divert from actuarial/market-based insurance? (2)
- Making insurance compulsory: to prevent low-risk profiles from exiting the market
- Decoupling risk profile and the risk premium
how do states intervene in the insurance market? (2)
- by regulating private insurers
- providing public insurance
Case Study 1
Unemployment insurance
What is it?
the type of insurance that provides you with money when you are unemployed.
(the person has to make regular contributions to benefit from the money)
Case Study 1
Unemployment Insurance
Technical Conditions (2)
(risk failure)
- Uncertainty: difficult to calculate the probability of being unemployed
- Risk: despite unemployment being an independent risk it may also be influenced by common risks, especially when there is a recession process
Case Study 1
Unemployment Insurance
Information Asymmetry (2)
(risk failure)
- Adverse Selection: it is difficult for insurers to differentiate the risks (don’t know what the job implies)
- Moral Hazard: people may be profiting from insurance
Case Study 1
Unemployment Insurance
Social Insurance to risk failures (3)
the government intervenes because it is easier to 1. deal with recessions (print more money), 2. redistribute resources and 3. prevent adverse selection (compulsory insurance)
Case Study 1
Unemployment Insurance
Unemployment Trap
when the efforts while working are not reflected in the money received while unemployed.
Case Study 1
Unemployment Insurance
Incentivising Employment (3)
- restricting unemployment insurance
- monitoring unemployment
- Active Labour Market Policies
Case Study 2
Old Age Pensions
what is it?
it protects old people from the risks of outliving their savings, thus, insurances pay old people an annuity each month
(the amount depends on the savings)
Case Study 2
Old Age Pensions
Supply Side - insurance failures (2)
- information asymmetry
- Uncertainties: annuity changes as the economy does (difficult to predict future economic changes)
Case Study 2
Old Age Pensions
Demand Side (3) leading to an inadequate actuarial insurance
- incomplete information
- Bounded Rationality: not enough knowledge to choose the good insurance
- Bounded willpower: people prioritise short-term savings (no savings when they are old)
Case Study 2
Old Age Pensions
How to make insurances more adequate for old people?
“Pay as you go”
by making insurances compulsory, thus, converting these into social insurances/public provisions
· current workers paying for pensions (increases efficiency & equity through resource redistribution)
Case Study 2
Old Age Pensions
Challenges
· decline between those who need support and those supporting
Case Study 2
Old Age Pensions
How to face challenges? (3)
- increasing individuals’ productivity
- reforming pensions
- state intervention (coverage gaps): convince people to save more & regulating private insurances
How do we deal with social risks? (4)
- savings
- friends/family
- private insurance
- social insurance
