On the Choice of an Index for Disclosure in the Life Insurance Market: An Axiomatic Approach

Abstract

This paper takes an axiomatic approach to the problem of determining which index (one-dimensional summary of policy parameters) is best used in a life insurance cost disclosure programme. In a simple economic model of a market for insurance contracts, indices are assessed according to the efficiency of the market equilibria that result when they are used as rules of thumb by consumers. Of the various criteria that might be imposed on an index, the axiom that generates a unique solution is that the index not bias the market outcome against policies that may be socially desirable in common terminology, that the index be immune to manipulation. Depending on the exact structure of administrative costs, one of three indices uniquely satisfies this requirement.