Social Insurance Flashcards
Insurance
payment of a premium to get payment in case of an adverse event
Social insurance programs definition
government provided insurance against adverse events funded by taxation
social insurance programs examples
health insurance (medicare)
retirement and disability insurance (pension, NDIS)
unemployment insurance (jobseeker)
expected profits of insurers
m.b - p.b
actuarially fair insurance
m=p (epi =0)
scenario with symmetric information
insurance companies and individuals can observe pH v pS types, and the insurance companies will charge 2 policies, each actuarially fair
adverse selection
when individuals know more about their risk level than the insurer and hence individuals with higher risk are more likely to purchase insurance
given asymmetric information, everyone wants to buy the healthy insurance which is cheaper, so the insurance company will make a loss
scenario with asymmetric information
insurance companies cannot observe pH vs pS types but individuals do
pooling equilibrium
insurance companies offer a contract based on average risk (good deal for sickly, mediocre deal for healthy, but better than no insurance
separating equilibrium
insurance companies offer two contracts: one expensive contract with full insurance for the sickly, one cheap contract with partial insurance for the healthy: each type self-selects into its contract - outcome not as efficient as healthy under-insured
death spiral
insurance is offered at average fair price, bad deal for low risk people and hence only high risk people buy it –> insurers make losses –> insurers raise the price further –> only very high risk people buy it
solutions for adverse selection
government can redistribute - natural solution is mandate which requires everyone to purchase insurance
reasons for social insurance
health care is a right
redistribution - society may want to compensate high risk people as this is not their fault
externalities
individual failures
administrative costs
moral hazard
adverse actions taken by insured individuals in response to insurance against adverse outcomes
central trade-off of social insurance
insurance is desirable for consumption smoothing but insurance can create moral hazard
what determines moral hazard
how hard it is to observe whether the adverse event has happened
how easy it is to change behaviour in to get into or stay in the adverse event
three important types of moral hazard
reduced precaution against entering the adverse state
increased odds of staying in the adverse state
increased expenditures when in the adverse state
two considerations for optimal social insurance trade-off
the benefit of social insurance is the amount of consumption smoothing provided by social insurance programs
the cost of social insurance is the moral hazard caused by insuring against adverse events
ironic feature of asymmetric information
it simultaneously motivates and undercuts the rationale for government intervention through social insurance
