Need Help In Microeconomics
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By using contingent commodities approach to risk, how do we show the average premium the insurance companies will charge to indiviual if there is asymmetric information?
Jill being more risk averse than Jack.
Suppose that Jack is a safer driver than Jill so that Jill has a greater probability of being Involved in an accident.
How how ani1 noe?? please teach T.T
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Are you a GCE "A" level H3 Economics student, a University of London (External Degree conducted by SIM) 2nd Year Microeconomics student or ???
A good reference for the study of Contigent Commodities Approach to risk and Insurance will be Microeoconomics by Katz and Rosen.
Since Jack is a safer driver, the insurance company will sell him a policy with a lower premium ie the budget line is flatter as the expected payout rate forJack for the insurance company is lower due the lower likelihood that Jack will make a claim.
For a detailed analysis of the topic of insurance for risk averse and risk-taking individuals with and without asymmetric information and moral hazard and the insurance company, you can refer to the textbook Microeconomic Analysis by Varian Pages 180 to 181 and Pages 455 and 456. However, you will need to know some calculus to understand the material covered in the intermediate to advanced level microeconomics textbook.
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If asymmetric information (between principal and agent) exist, I would probably say that both are charged (same) the average of the probability contingent commodity, plus a small profit for the trouble of hiring actuaries to calculate the probability.
**I have no idea what is "contingent commodities approach to risk", but I googled and found "contingent commodity", which means a new commodity resulting from the occurrence of a particular event.
****I am not an Econs grad, so don't blame me if my answer is wrong.
PS: Women are bad drivers.
Serious. -
Indeed, the insurance companies will charge the same average of the probability contingent commodity, plus a small profit for the trouble of hiring actuaries to calculate the probability BUT the spread of the risk profiles of the drivers must not be too large.
So, the insurance companies will charge different premiums for different distinctively risk profile drivers eg charge different premiums for multiple claims, drunken and dangerous driving drivers and accident free drivers.
If due to many high risk profiles drivers and high expected claims and as a result the average premium is charged high, the average/low risk profile drivers will decide to opt out and the insurance companies will make losses and decides to stop to offer the insurance. So, there is the need to charge different premiums for different risk profile drivers.
However, this will usually not happen as the government has made it mandatory for all drivers to buy car insurance and so even if the premium is very high, the drivers will still have to buy the insurance.
In addition, there is the element of fraud and the moral hazard of the drivers who have bought the insurance to drive less carefully as they know that they can make claims when they met with accidents. The insurance companies will factor in these factors too when they charge the average premium.
Indeed, insurance companies in Singapore have been making losses for years for offering car insurance as there are many excessive and inflated claims and to reduce losses and make profits, the insurance companies have required 24 hours to 48 hours ruling for drivers to report to the insurance companies' workshop, refuse to sell insurance to these multiple claims drivers, raise the premium sharply not due to the fault of the majority of the drivers but due to the excessive and inflated claims of a minority drivers, charge different premiums for multiple claims drivers and accident free drivers and so on.
To factor in all these factors, we will need to formulate the maximisation problem subject to constraints.
To summarise, insurance companies will charge a lower premium to low risk driver and a higher premium to high risk driver.
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I will leave the bargaining powers of each participant in a repeated game to charlize.
Master should be able to explain optimisation in the terms of autoregression.
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How many times must I tell you all.
Google, google, google.
Everything I know, I do it through the internet.
You can too.
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Yeah yeah leave it to me to answer to your incompetencies
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No OT tonight?
Can help the other student with macroeconomics?
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We allow you to shine.
And fulfill your potential.
Really.