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Prevention incentives in long-term insurance contracts

Abstract : Long-term insurance contracts are widespread, particularly in public health and the labor market. Such contracts typically involve monthly or annual premia which are related to the insured's risk profile. A given profile may change, based on observed outcomes which depend on the insured's prevention efforts. The aim of this paper is to analyze the latter relationship. In a two-period optimal insurance contract in which the insured's risk profile is partly governed by her effort on prevention, we find that both the insured's risk aversion and prudence play a crucial role. If absolute prudence is greater than twice absolute risk aversion, moral hazard justifies setting a higher premium in the first period but also greater premium discrimination in the second period. This result provides insights on the trade-offs between long-term insurance and the incentives arising from risk classification, as well as between inter- and intragenerational insurance.
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Contributor : Elisabeth Lhuillier Connect in order to contact the contributor
Submitted on : Tuesday, September 19, 2017 - 11:59:02 AM
Last modification on : Wednesday, August 5, 2020 - 3:17:46 AM

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Renaud Bourlès. Prevention incentives in long-term insurance contracts. Journal of Economics & Management Strategy, 2017, 26 (3), pp.661--674. ⟨10.1111/jems.12196⟩. ⟨hal-01589993⟩



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