A model of insurance markets with incomplete information

Abstract The paper investigates how a competitive market would allocate insurance policies if firms were not able to determine the riskiness of individual consumers. It is demonstrated that if all firms have static expectations with regard to the policy offers of other firms, no stationary equilibrium may exist. A second equilibrium concept is then introduced which incorporates a different expectation rule. Each firm assumes that any policy will be immediately withdrawn which becomes unprofitable after that firm makes its own policy offer. This equilibrium is shown to exist and some of its welfare properties are investigated.