Abstract
This paper investigates the welfare implications of rate classifications when classification is costly, and these results are compared with the market outcome. The private decision by an insurer whether to monitor the extent of an activity reflects social costs and benefits, but the gains may not exceed the costs. With respect to variables that separate low-risk from high-risk individuals, the gains from separation may be small, and the market may give overinvestment in information from society’s point of view. When neither the insurer nor the insured know the expected loss, it may be efficient to determine the risk, despite the added variance in premiums.
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Rea, S.A. (1992). Insurance Classifications and Social Welfare. In: Dionne, G. (eds) Contributions to Insurance Economics. Huebner International Series on Risk, Insurance and Economic Security, vol 13. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-1168-5_15
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DOI: https://doi.org/10.1007/978-94-017-1168-5_15
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