Equilibrium in Insurance Markets with Experience Rating

  • Howard Kunreuther
  • Mark Pauly


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.


Insurance Market Risk Class Expected Profit Perfect Information Inside Information 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Cyert, R. and J. March (1963) A Behavioral Theory of the Firm ( Englewood Cliffs, N.J.: Prentice-Hall).Google Scholar
  2. Dahlby, B. (1980) ‘Adverse Selection and Pareto Improvements Through Compulsory Insurance’, (mimeo).Google Scholar
  3. Follman, Joseph, Jr. (1963) Medical Care and Health Insurance ( Homewood, Ill.: Irwin) ch. 18.Google Scholar
  4. Grossman, H. (1979) ‘Adverse Selection, Dissembling and Competitive Equilibrium’, Bell Journal of Economics, 10, 336–43.CrossRefGoogle Scholar
  5. Jaynes, G. (1978) ‘Equilibria in Monopolistically Competitive Insurance Markets’, Journal of Economic Theory, 19, 394–422.CrossRefGoogle Scholar
  6. Johnson, W. (1978) ‘Overinsurance and Public Provision of Insurance: Comment’, Quarterly Journal of Economics, 92, 693–6.CrossRefGoogle Scholar
  7. Kunreuther, H. (1976) ‘Limited Knowledge and Insurance Protection’, Public Policy, 24, 227–61.Google Scholar
  8. Kunreuther, H. and M. Pauly (1981) ‘Market Equilibrium with Learning: Experience Rating of Insurance’, mimeo.Google Scholar
  9. Kunreuther, H. et al. (1978) Disaster Insurance Protection ( New York: Wiley).Google Scholar
  10. Miyasaki, H. (1977) ‘The Rat Race and Internal Labor Markets’, The Bell Journal of Economics, 8, 394–418.CrossRefGoogle Scholar
  11. Pauly, M. (1974) ‘Over Insurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection’, Quarterly Journal of Economics, 88, 44–62.CrossRefGoogle Scholar
  12. Rothschild, M. and J. Stiglitz (1976) ‘Equilibrium in Competitive Insurance Markets: An Essay in the Economics of Imperfect Information’, Quarterly Journal of Economics, 90, 629–49.CrossRefGoogle Scholar
  13. Spence, M. (1973) ‘Job Market Signaling’, Quarterly Journal of Economics, 87, 355–74.CrossRefGoogle Scholar
  14. Spence, M. (1978) ‘Product Differentiation and Consumer Choice in Insurance Markets’, Journal of Public Economics, 10, 427–47.CrossRefGoogle Scholar
  15. Williamson, O. (1975) Markets and Hierarchies ( New York: The Free Press).Google Scholar
  16. Wilson, C. (1977) ‘A Model of Insurance Markets with Incomplete Information’, Journal of Economic Theory, 16, 167–207.CrossRefGoogle Scholar

Copyright information

© Jörg Finsinger 1983

Authors and Affiliations

  • Howard Kunreuther
  • Mark Pauly

There are no affiliations available

Personalised recommendations