Competitive Failures in Insurance Markets
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Leading international economists offer new insights on recent developments in the economic analysis of the limits of insurability, with particular attention of adverse selection and moral hazard. Risk sharing is a cornerstone of modern economies. It is valuable to risk-averse consumers and essential for investment and entrepreneurs. The standard economic model of risk exchange predicts that competition in insurance markets will result in all individual risks being insured - that all diversifiable risks in the economy will be covered through mutual risk-sharing arrangements - but in practice this is not the case. Many diversifiable risks are still borne by individuals; many environmental, catastrophic, and technological risks are not covered by insurance contracts. In this CESifo volume, leading international economists provide new insights on recent developments in the economic analysis of the limits of insurability. They find that asymmetric information is a central reason why competition in insurance markets may fail to guarantee that mutually advantageous risk exchanges are realised in today's economies. In particular, adverse selection and moral hazard help explain why competitive insurance markets fail to provide an efficient level of insurance and hence why public intervention is required to solve the problem.