Abstract
This paper focuses on the effects of bans on insurance risk classification on utilitarian social welfare. We consider two regimes: full risk classification, where insurers charge the actuarially fair premium for each risk, and pooling, where risk classification is banned and for institutional or regulatory reasons, insurers do not attempt to separate risk classes, but charge a common premium for all risks. For the case of iso-elastic insurance demand, we derive sufficient conditions on higher and lower risks’ demand elasticities which ensure that utilitarian social welfare is higher under pooling than under full risk classification. Empirical evidence suggests that these conditions may be realistic for some insurance markets.
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Notes
- 1.
Specifically, a generalised form of the Kumaraswamy [2] distribution. Similarly, any other distribution for γ will imply its own corresponding demand function.
- 2.
References
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Kumaraswamy, P.: A generalized probability density function for double-bounded random processes. J. Hydrol. 46, 79–88 (1980)
Nozick, R.: Anarchy, State and Utopia. Basic Books, New York (1974)
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Chatterjee, I., Macdonald, A.S., Tapadar, P., Thomas, R.G. (2018). When Is Utilitarian Welfare Higher Under Insurance Risk Pooling?. In: Corazza, M., Durbán, M., Grané, A., Perna, C., Sibillo, M. (eds) Mathematical and Statistical Methods for Actuarial Sciences and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-89824-7_40
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DOI: https://doi.org/10.1007/978-3-319-89824-7_40
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