Studied by 5 people
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Actuarial insurance = market-based insurance
the mechanism, where the price of your insurance reflects your expected loss
your premium ( the price for which insurance will be provided) = the probability of the loss x value of what you insure
Where is the actuarial insurence not mandatory ?
USA
What justifies state intervention in insurance markets?
efficiency and fairness, when there is a market failure
The most common market failure in insurence field
information asymetry
Information asymmetry ( adverse selection )
when there is hidden knowledge before buying insurance (second-hand hands- a lot of hidden information, when the seller has more information than a buyer), buyers can not be indifference the good and bad
he ability to hide information before eyopu buy or sell something thaty characterise advetrse selection
Market of lemons
(Akerlof 1970)
Lemon is slang for low-quality second-hand car
Asymmetry information (from the insured person side )Adverse selection
if you are a good or a bad driver ( u are hiding to insurence ) its hard to tell for the insurance if you low or high risk
Why the ones with low risk will leave the market
because the new premium may be toon high in light of the risk they want to cover
Why Adverse selection results in undersupply of actuarial insurance?
because Leaves only ‘higher-risk’ individuals still willing to buy insurance; so low-risk individuals are without desired insurance coverage )
cream-skimming (Adverse selection )
Insurer tries hard to recruit only the clearly good risks and avoid potentially bad risks —> Leaves some high-risk individuals without desired insurance coverage
Information asymetry (moral hazard)
when there is hidden knowledge after buying insurance
when you act more reasonable after getting insurance
information asymetry drives the dynammics
restrictions by insurences to avoid it
n many cases, the possibility of moral
hazard may result in under-provision of
adequate insurance
restrictions by insurance to avoid moral hazard
some level of protection but maybe like - you can only water it 2 times
rising premium after each accident
How can governments intervene in insurance markets
by making insurance mandatory
public insurences
Why do governments often intervene in insurance markets?
insurance failure
information asymmetry
efficiency ( can make insurance mandatory )
Common shook
natural disaster, pandemic
What are the conditions for the insurence market to exist?
There should be no information on asymmetry
Risks should be independent of each other ( so no common shooks, pandemics, inflation)
It should be a risk, not a certainty
or uncertainty
Uncertainty: Insurers need to be
able to calculate risk ( how much premium)
Certainty: Who will insure you if
Do you have chronic or preexisting conditions?
behavioral issues: bounded willpower (procrastination) and bounded rationality (no decision made when its too complex)
Why is there a state intervention in
insurance markets, beyond market
failures
because of fairness and equality
Your risk premiim should
always reflect your risk profile
What breaks the link between risk profile and risk premium
risk solidarity - societal decision
Ways of breaking the actuarial insurance
making participation mandatory
Decoupling premium and individual risk
How can we break the actuarial insurance - strategies
Heavy regulation of private insurers and individuals (e.g. prohibiting exclusion; mandating purchase)
Public organization of social insurance
Actuarial insurence
Efficient when first-best-world conditions are fulfilled
If not, absent or prohibitively expensive
market-based insurance mechanism,
where the price of your insurance reflects your expected loss)
Social insurence
it Deals with missing insurance markets and creates an opportunity for risk-solidarity
Insurence ( definition )
offers a way to deal with risks by sharing risks collectively
unemployment insurance
insurance protects you against the risk of losing your income when you lose your job
In return for regular contributions, you receive an unemployment benefit during this period
Why is it difficult to organise unemployment insurance through markets?
because of technical conditions :
no certainty, nor uncertainty - no issue
risks are independent - unemployment risks are correlated during crises ( kiedy jest economic crises to duzo osob jest unemployed)
because of information asymmetry :
adverse selection - hard to tell t for insurers between the risks
moral hazard - you can influence the probability of being unemployed
Governments step in where markets fail
social insurence can protect the vonerubale poeple, it rescue
Easier to deal with recessions
Easier to deal with adverse selection
Easier to protect the most vulnerable
Even possible to redistribute resources
Does unemployment insurance create an unemployment trap?
Yes, because the thing you receive by working and what you receive through unemployment benefits its too small to be worth the effort
Reforming unemployment
insurance: How to promote labour
market participation?
Making unemployment insurance more restrictive:
Lower benefits that decrease over time
Monitoring ‘job-seeking efforts’, as a condition for benefits
Active Labour Market Policies:
Training and skills development
Job centers to facilitate matching
Wage subsidies to make hiring more attractive
The biggest risk in unemployment insurance?
Moral hazard
What do pensions have to do with risks?
Pensions replace the income from labor
Using savings for consumption smoothing
Old age income insurance protects against the risk that you will outlive your savings
In return for your savings, you are guaranteed a regular fixed amount (i.e.annuity) until your death
what are the problems on the supply side when organising the old age income insurance?
information asymetry (Adverse selectionand moral hazard
uncertainity regarding future inflation
what are the problems on demand side when organising the old age income insurence?
incompleete information
bounded rationality
bounded will-power
more problem on the demand side
How state can intervane in old insurence?
It can help to make it more adequate, basic participation in age insurance will influence equity
pension schemes
regulating private insurance markets ( mandatory purchase )
Two functions of the welfare state (Barr 2001)
Welfare state as Robin Hood
Welfare state as Piggy Bank
Welfare state as Robin Hood
Providing poverty relief, redistributing income and wealth, and reducing social exclusion
Welfare state as Piggy Bank
Providing insurance and offering mechanisms for redistribution over the life-cycle
Why divert from market-based insurance?
Mandatory participation
Decoupling risk profile and risk premium
fairness/efficiency reasons
Efficiency reasons
Information asymmetry
Other market failures
Fairness reasons
Risk redistribution/solidarity vs Income redistribution/solidarity
Can adverse selection be a policy instrument?
Tax polluting production (Pigouvian tax) to
internalize the negative externality
Which of the following statements regarding actuarial or market-based insurance is correct?
Insurance schemes can cover very large risks, as long as the insurance company manages to collect sufficient risk premiums to cover the damage (as long as the sum of all collected premia is sufficient to cover the damage of this large risk, the insurance company does not get into trouble. )
What is the most accurate way to calculate the price of insurance that is actuarially fair?
Multiplying the value of what you insure with the probability of loss.
Which situations is characterized by the dynamic of Adverse Selection?
A real estate agent does not mention the hidden defects of a house to potential buyers, this in order to get a better deal out of the sale.
Which of the following statements regarding adverse selection and moral hazard in insurance markets is correct?
Adverse selection is often dealt with through cream-skimming, while deductibles are more appropriate to deal with moral hazard.
Deductibles
the amount of money that the policyholder must pay out-of-pocket before the insurance company pays for a covered claim, it discourages people to behave riskier, once they are insured ( moral hazard)
Which market failure results in insufficient demand for actuarial insurance?
Bounded rationality.
Which market failure results in insufficient supply for actuarial insurance?
moral hazard
In order to have viable insurance markets, it is important that risks are not strongly correlated with each other. Why is that the case?
If risks are too correlated, insurance companies may have to pay out too many insurance holders at the same time ( e.g. many people becomes unemployed as result of an economic crisis)
Why do insurance companies sometimes offer different risk premia to men and women, even if they are very similar in all other respects?
Because insurance companies use data that indicates that these particular risks happen to be different for men and women.
What would be a bad reason to prefer social insurance over actuarial insurance?
Insurance is too important to leave to commercial actors
( social insurance is not superior to market-based insurance. Market-based insurance can do an excellent job; yet in certain occasions it fails to deliver a fair and/or efficient outcome. In this situation, social insurance can be preferable over market-based insurance offered by commercial actors )
Organizing actuarial old age income insurance entails several market failures, resulting in both inadequate supply and inadequate demand.
Which of the following factors results in problems with supplying market-based pensions?
Information asymmetry.
Why Moral hazard is a major problem in organizing unemployment insurance.
Insurance providers find it very difficult to find out whether unemployment results from unwillingness to find work, rather than inability to find work.
Note
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