Equilibrium in Insurance Markets with Experience Rating
This chapter investigates the functioning of insurance markets in which insurers can obtain specific and private knowledge of the characteristics of their customers. In particular, we focus on the case where the insurer obtains ‘inside information’ by observing the loss experience of its customers and utilizes these data to charge differential premiums. This type of ‘experience rating’ of individuals or groups is commonly used by firms in setting rates for automobile, health, and unemployment insurance.
KeywordsInsurance Market Risk Class Expected Profit Perfect Information Inside Information
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