Equilibrium In Insurance Research Articles

Supply, demand, and selection in insurance markets: Theory and applications in pictures

AbstractThis paper recapitulates and extends the Einav, Finkelstein, and Cullen (EFC) approach to modeling equilibrium in insurance markets. After describing the basic EFC model and showing that it can be understood as a supply–demand model, we show how it can be extended to: markets featuring nonexclusive contracting and linear pricing; markets featuring selection on ex‐ante moral hazard; and multiple‐margin markets with price competition over two coverage tiers. In markets with nonexclusive‐contracting‐cum‐linearly pricing, we show that the EFC model, graphs, and lessons all go through, essentially unchanged. In markets with selection on moral hazard, we show that two natural notions of adverse selection—notions that coincide in the basic EFC framework—may diverge. This divergence is a result of the fact that, with moral hazard, the average cost curve measured by EFC can no longer be interpreted as a supply curve. Finally, in a two‐tier market, we show that the lessons depend on whether contracts are offered “simultaneously” or “sequentially,” where coverage is purchased in layers.

An Equilibrium-Based Measure of Systemic Risk

This paper develops and implements an equilibrium model of systemic risk. The model derives a systemic risk measure, loss beta, in characterizing all too-big-to-fail banks using a capital insurance equilibrium. By constructing each bank’s loss portfolio with a recent accounting approach, we perform a comprehensive empirical study of this loss beta measure and document all TBTF banks from 2002 to 2019. Our empirical findings suggest a significant number of too-big-to-fail banks in 2018–2019.

Can Employers Solve the Adverse Selection Problem for Insurers?

Establishing the existence of equilibrium in insurance markets has always been a challenging task for economists due to imperfect information. As illustrated by Rothschild and Stiglitz (1976), imperfect information may lead to complete market failure. This paper extends the standard model of adverse selection by introducing employers that choose the set of policies that are offered to consumers. Introducing employers allows for the existence of multiple pooling and a unique separating equilibrium. The key to these results is that the financial incentives of the employers in the model differ from the financial incentives of the insurance companies. Data on age and insurance premiums from the 1987 National Medical Expenditure Survey provides evidence of pooling in the employer-provided health insurance market. JEL classification: D82; I18

Large losses and equilibrium in insurance markets

We show that if losses are larger than wealth, then individuals with the option of declaring bankruptcy will not insure if the loss probability is above a threshold. In an insurance market with adverse selection, if the high risks’ loss probability is above the threshold, then no trade occurs at the Rothschild–Stiglitz equilibrium. Active trade in insurance requires cross-subsidization. When a subset of individuals with significant costs of bankruptcy and default is included in the market, then the equilibrium outcome always involves positive levels of insurance coverage for some individuals, but the parameters of the model determine whether all types receive coverage, or whether null contracts are received by both high and low risks with no bankruptcy costs or just the low risks from that group.

Individual Health Insurance Market with an Entrant – The ACA Health Insurance Exchange Observations

Abstract In this paper, a general framework is built up to model the dynamic of consumer health plan choice and individual health insurance market competition. A primary goal is to identify driving forces to individual health insurance equilibrium market coverage and premium. In the baseline model, we introduce plan quality information search cost as an additional determinant to consumer’s plan choice. Health insurers compete under the Hotelling’s game theory framework. Equilibrium solutions of the baseline model highlight the importance of budget limit and information search cost to health plan enrollment. The more important objective is to examine the impact of market entrants on equilibrium insurance market coverage and plan prices. In the model with market entry, we add an additional dimension to the baseline model. Equilibrium solutions and numerical studies show positive impact of higher insurance market coverage and lower health plan prices. The Affordable Care Act (ACA) brought multiple unprecedented changes to the health insurance market and provided opportunities to study market dynamics and driving forces. The ACA health insurance exchange market experience shows consistency with our model findings even at the early stage of implementation. More importantly, market observations suggest that entry barriers of claim costs and information search cost are high for entrants.

Equilibria and incentives in private information economies

This paper considers three solution concepts in a large private information economy, namely, Walrasian expectations equilibrium, private core, and insurance equilibrium. It shows that these three concepts coincide with each other when the agents are informationally negligible in such an economy. In contrast to the finite-agent setting, one can construct a large private information economy in which incentive compatibility fails completely in the sense that almost every agent in any Walrasian expectations equilibrium/private core/insurance equilibrium allocation has the incentive to misreport her type.

Competitive equilibrium in insurance markets under adverse selection and non-expected utility

Competitive equilibrium in insurance markets under adverse selection and non-expected utility

Modeling Competition and Market Equilibrium in Insurance: Empirical Issues

Modeling Competition and Market Equilibrium in Insurance: Empirical Issues by Pierre-Andre Chiappori and Bernard Salanie. Published in volume 98, issue 2, pages 146-50 of American Economic Review, May 2008

The impact of managed care on the existence of equilibrium in health insurance markets

This study examines the existence of equilibrium in insurance markets when the number of insurance policy attributes is increased (i.e., managed care is introduced). Individuals choose an insurance contract from an endogenous choice set. The introduction of managed care improves the ability of low risks to distinguish themselves from high risks. This may yield equilibrium in cases when it would not exist in an FFS-only environment. However, managed care expands the product space in which a pooling policy could break a separating equilibrium. Thus, existence of equilibrium in an FFS-only environment does not imply existence with managed care.

Increasing Social Variability and Insurance Equilibrium

Increasing Social Variability and Insurance Equilibrium