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Equilibrium in Insurance Markets: An Empiricist’s View

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Abstract

Empirical models of insurance markets would greatly enhance our ability to understand policy-relevant questions. Yet they are still quite rare. This paper sketches such a model and surveys its basic elements. While much progress has been made in recent years in our understanding of insurance demand in particular, the most crying need is for market-wide data.

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Notes

  1. In the Test-Achats ruling of 1 March 2011, case C236-09.

  2. See Dionne and Rothschild (2014) for an excellent review of the theoretical literature on risk classifications bans.

  3. To be fair, there did not seem to be much demand for it: the ECJ ruling was phrased in terms of fundamental rights.

  4. Chiappori and Salanié (2008).

  5. Rothschild and Stiglitz (1976).

  6. Berry et al. (1997).

  7. Mimra and Wambach (2014).

  8. Azevedo and Gottlieb (2016).

  9. Einav et al. (2010).

  10. Handel et al. (2015).

  11. Berry et al. (1995).

  12. Curto et al. (2015).

  13. Decarolis et al. (2016).

  14. One of these varieties may be the “outside good” (when the consumer chooses not to buy any variety.) Sometimes the analyst only has good data on actual buyers. This will typically be the case with insurance data but it is not a serious difficulty, unless of course one wants to focus on the reason why some of the population is non-insured. Hendren (2013) has shown how this may happen in large segments of some insurance markets.

  15. Berry et al. (2004).

  16. In both cases, private insurers are subsidized by the government.

  17. This is not to rule out other elements: dynamics, learning, ex post moral hazard and fraud, etc. They are all important but would complicate the exposition at this stage. I return to some of them later.

  18. Cohen and Einav (2007).

  19. Barseghyan et al. (2015).

  20. E.g., Jullien and Salanié (2000), Gandhi and Serrano-Padial (2015), and Chiappori et al. (2016).

  21. Barseghyan (2013, 2016).

  22. Such data are only available in small surveys, with rare exceptions (e.g., Finkelstein and McGarry 2006).

  23. Barseghyan et al. (2013, p. 2527).

  24. Chiappori et al. (2016).

  25. See Sydnor (2010) for a recent study.

  26. Handel (2013).

  27. Ericson (2014).

  28. Chetty (2015).

  29. Bernheim and Rangel (2009).

  30. Pouyet et al. (2008) show that self-selection does not change the set of equilibria if it only bears on private values and competition is perfect. This result has little bite in insurance, given that the probabilities \(q_i\) generate self-selection on common values and competition is imperfect.

  31. Some of the milestones are Puelz and Snow (1994), Chiappori and Salanié (2000), Finkelstein and Poterba (2004), and Chiappori et al. (2006). The early literature simply argued that under a single-crossing condition, riskier insurees would buy more coverage. Later contributions have generalized this result under an additional condition on the relationship between profits and coverage.

  32. Chiappori and Salanié (2013).

  33. Chiappori et al. (2016) in fact found that this condition did not hold in their application.

  34. As a contract theorist, I must admit that the common use of “adverse selection” as a catch-all term for all self-selection has contributed to the confusion.

  35. See Weisburd (2015) for a recent example. Escanciano et al. (2016) show how to construct formal tests of the null hypothesis of no moral hazard in this context.

  36. E.g., Abbring et al. (2003) and Dionne et al. (2013).

  37. Attar et al. (2011, 2014, 2016).

  38. Attar et al. (2016).

  39. To be (slightly) more precise: this allocation is entry-proof, but it may fail to be an equilibrium.

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Authors and Affiliations

  1. Department of Economics, Columbia University, New York, NY, USA

    Bernard Salanié

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  1. Bernard Salanié
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Correspondence to Bernard Salanié.

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This paper was written on the occasion of the 2016 Geneva Risk Economics Lecture in Limassol, Cyprus. I am very grateful to the European Group of Risk and Insurance Economists for its invitation, and to an editor for his comments. The paper relies heavily on joint work with Juan Carlos Escanciano, Amit Gandhi, Bruno Jullien, Jérôme Pouyet, Neşe Yıldız, and especially Pierre-André Chiappori and François Salanié. While I am very grateful to each of them for our collaborations, they bear no responsibility for any mistake in this paper. My discussant Art Snow made many useful comments that made this paper much better than the lecture I originally gave.

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Salanié, B. Equilibrium in Insurance Markets: An Empiricist’s View. Geneva Risk Insur Rev 42, 1–14 (2017). https://doi.org/10.1057/s10713-017-0019-2

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