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Insurer Commitment and Dynamic Pricing Pattern
Journal
Geneva Risk and Insurance Review
ISSN
1554-964X
ISSN-Digital
1573-6954
Type
forthcoming
Author(s)
Zenan, Wu
Abstract
A central issue in dynamic contracting is the type of inter-temporal pricing pattern. Some insurance products exhibit a highballing (front-loaded) pattern and others a lowballing (back-loaded) pattern, while still others are flat. We develop a unified competitive dynamic insurance model with asymmetric learning to investigate the impact of insurer commitment on the equilibrium inter-temporal pricing pattern. The model predicts that the equilibrium contract exhibits highballing under one-sided commitment and lowballing under no commitment. We then use a unique empirical setting of two products from one insurer, eliminating heterogeneity in firm, market, time horizon, information frictions, and learning environment, to isolate the role of insurer commitment in determining the pricing pattern. Consistent with our theoretical predictions, we find that (i) the dynamic contracts exhibit a highballing pattern in loaner’s personal accident insurance, a one-sided commitment scenario, and (ii) a lowballing pattern in group critical illness insurance, a no commitment scenario.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Palgrave Macmillan
Publisher place
Basingstoke
Division(s)
Contact Email Address
ruo.jia@pku.edu.cn
Eprints ID
255118