The Welfare Effects of Contestability in Insurance

12 Pages Posted: 8 Jun 2006 Last revised: 10 Dec 2008

See all articles by Rob van der Noll

Rob van der Noll

Authority for Consumers & Markets (ACM)

Francesco Paolucci

Australian Centre for Economic Research on Health (ACERH-ANU) & Health Policy and Management (iBMG-EUR)

Date Written: December 2008

Abstract

We study an insurance model characterized by a continuum of risk types, private information and a competitive supply side. We investigate the contestability clause in the policy: when a claim is filed, the insurer may dispute it on grounds of the information provided by the insuree. Smoking in life insurance is our leading example: there are different rates for smokers and non-smokers. We compare the aggregate utility in a two contracts economy with a one, non-contestable contract economy. Having two contracts alleviates adverse selection, but increases the risk in the smokers pool. The negative effect dominates: contestability decreases welfare.

Keywords: insurance, contestability, smoking

JEL Classification: D82, K29

Suggested Citation

van der Noll, Rob and Paolucci, Francesco, The Welfare Effects of Contestability in Insurance (December 2008). Available at SSRN: https://ssrn.com/abstract=907279 or http://dx.doi.org/10.2139/ssrn.907279

Rob Van der Noll (Contact Author)

Authority for Consumers & Markets (ACM) ( email )

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Netherlands
+31 70 7222581 (Phone)

Francesco Paolucci

Australian Centre for Economic Research on Health (ACERH-ANU) & Health Policy and Management (iBMG-EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands
0031104088535 (Phone)

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