ON THE OPTIMALITY OF A STRAIGHT DEDUCTIBLE UNDER BELIEF HETEROGENEITY

This article attempts to extend Arrow’s theorem of the deductible to the case of belief heterogeneity, which allows the insured and the insurer to have different beliefs about the distribution of the underlying loss. Like Huberman et al. [(1983) Bell Journal of Economics14(2), 415–426], we preclude ex post moral hazard by asking both parties in the insurance contract to pay more for a larger realization of the loss. It is shown that, ceteris paribus, full insurance above a constant deductible is always optimal for any chosen utility function of a risk-averse insured if and only if the insurer appears more optimistic about the conditional loss given non-zero loss than the insured in the sense of monotone hazard rate order. We derive the optimal deductible level explicitly and then examine how it is affected by the changes of the insured’s risk aversion, the insurance price and the degree of belief heterogeneity.

Analysis of Climate Index with Historical Burn Analysis Method for Climate Change Adaptation (A Case Study in Pacitan District, East Java)

Drought recurrently occurs in Indonesia, and it is one of the climate-related hazards that has a major impact on agriculture and food security. However, there is no a scheme, which allows any damages in agriculture associated with drought event will get an insurance. This study aims to analyze the climate index based on the potency of drought in Pacitan District, East Java to support the development of climate index insurance as an effort to climate change adaptation. This study used a climate index derived from monthly rainfall data, which was calculated based on the historical burn analysis (HBA) method. We examined climate index and measured exit value as representing of the lowest value which payment of insurance should be fully paid. Our results showed that the value varies among sub-districts in Pacitan. Kebonagung sub-district revealed the highest exit value (89 mm), which means the insurance company should pay the full insurance coverage if the rainfall in the period insured below 89 mm. The lowest exit value (18 mm) was in Pringkuku sub-district. Our finding revealed that the index HBA is suitable to be applied in regions with limited climate data. Furthermore, our approach could be one of the strategies to cope with drought to stabilize rice production during the dry season. For wide implementation, supports from government through regulation is needed.

Collusion in a One-Period Insurance Market with Adverse Selection

We show that collusive-seeming outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model and assume that insurance is compulsory and involves a minimum premium and minimum coverage; these are common features in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one where low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance, while the low risks' coverage decreases as the firms' profits increase.

Analyse des effets de l’assurance et de la relation de confiance consommateur-producteur sur les possibilités d’abus des chirurgiens

The object of this paper is to analyse the effects of insurance and of the relation of trust between consumer and producer on the possibilities of fraud by the producer. Fraud is defined as the provision of unnecessary services to a consumer who does not possess full information about the quality of his purchase. The possibilities of fraud increase with insurance. In particular, they are very high with full insurance since real cost of search tends to infinite. Also we verify that good trust between consumer and producer limits search activities. We apply this model to the market of surgeons in the United States. This market reflects the main characteristics of the model: the consumer is not well informed, the relation of trust is important, the cost of search is high, the service is largely insured and there is excess capacity.