We thank Michael Hoy, Jason Strauss, Masako Ueda, Richard Watt, and seminar participants at the 2010 Risk Theory Society Meeting and the 2008 European Group of Risk and Insurance Economists Seminar for helpful comments, and Georges Dionne (the editor) and two anonymous referees for superb advice. All errors are our own.
A Theory of the Demand for Underwriting
Article first published online: 23 NOV 2011
© The Journal of Risk and Insurance, 2011
Journal of Risk and Insurance
Volume 79, Issue 2, pages 335–349, June 2012
How to Cite
Browne, M. J. and Kamiya, S. (2012), A Theory of the Demand for Underwriting. Journal of Risk and Insurance, 79: 335–349. doi: 10.1111/j.1539-6975.2011.01436.x
- Issue published online: 23 MAY 2012
- Article first published online: 23 NOV 2011
We examine the demand for underwriting and its effect on equilibrium in an insurance market in which insureds know their risk type, but insurers do not. Our analysis indicates that a set of policies including one that requires buyers to take an underwriting test can constitute a full coverage Nash equilibrium when perfect classification is possible. We also find that underwriting equilibria, in which low risks obtain greater coverage than they would without underwriting, widely exist in a Wilsonian market with nonmyopic insurers. Our findings provide a potential explanation for why empirical evidence on adverse selection is mixed.