Modul III

Hidden characteristics occur when one party has more information than the other, often leading to adverse selection where high-risk individuals are more likely to purchase insurance.

This model shows how adverse selection leads to market inefficiencies. Insurers cannot differentiate between high- and low-risk individuals, leading to pooling or separating equilibria in insurance contracts.

A Nash equilibrium in insurance occurs when no insurer can offer a profitable contract that will attract consumers without making losses, ensuring no profitable deviations from the current set of contracts.

In Wilson equilibrium, insurers consider the possibility of unprofitable contracts being withdrawn. This equilibrium always exists and may result in a pooling contract if no Nash equilibrium is present.

This model introduces experience rating, where premiums or coverage depend on the individual’s past claims. It helps in separating high-risk and low-risk individuals more effectively.