Date of this Version
Journal of Risk and Uncertainty
New models of multi-period insurance show that health insurance buyers can be protected against changes in premiums from health shocks associated with chronic conditions by the addition of “guaranteed renewability” provisions. These models assume that a buyer’s risk level in every time period is observed by all insurers. They also require a premium sequence that is “front-loaded,” which may be costly to buyers if capital markets are imperfect. We relax the common knowledge feature of the model by assuming that a person’s risk in any time period is known only by that individual and the current insurer. One might suspect that a premium sequence with higher later period premiums would be incentive compatible because low risks will have less desirable offerings from alternative insurers. However, we show that generally, only the original premium schedule is incentive compatible, and attempts to alter front-loading will not be an equilibrium.
The final publication is available at Springer via http://dx.doi.org/10.1007/s11166-011-9124-2
health insurance, adverse selection, guaranteed renewability, equilibrium
Pauly, M., Menzel, K., Kunreuther, H., & Hirth, R. A. (2011). Guaranteed Renewability Uniquely Prevents Adverse Selection in Individual Health Insurance. Journal of Risk and Uncertainty, 43 (2), 127-. http://dx.doi.org/10.1007/s11166-011-9124-2#citeas
Date Posted: 27 November 2017
This document has been peer reviewed.