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A Game-Theoretical Interpretation of Guaranteed Renewability in Health Insurance

Authors

  • Salam Abdus

    1. Salam Abdus is with the Social and Scientific Systems, 540 Gaither Road, Rockville, MD 20850; phone: (301) 427-1685; e-mail: salam.abdus@ahrq.hhs.gov. The views expressed in this article are those of the author, and no official endorsement by the Social and Scientific Systems is intended or should be inferred. The author thanks Professors V. V. Chari and Andrew McLennan at the University of Minnesota and two anonymous referees for their helpful comments and suggestions. However, all errors in this manuscript are the author's responsibility. This article was subject to double-blind peer review.
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Abstract

A game-theoretical model is developed here that can explain why the premiums of the health insurance contracts in the individual health insurance market do not vary that much over time, even in absence of any legal restriction on premiums. In this model the insurer and the individuals interact for an infinite number of periods, and the threats of punishments in case of deviations force both the insurer and the individuals to stay on a constant premium path. This model, unlike the other models of guaranteed renewability, does not presume commitment of the insurer.

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