Competition and Insurance Twenty Years Later

We are honored to address the European Group of Risk and Insurance Economists and will take the opportunity to make some reflections on the rather uneasy relationship between insurance and competition. Economists generally prescribe competition as a solution for markets that do not work well. Competition allocates resources efficiently and encourages innovation and attention to what customers want. Insurance markets differ from most other markets because in insurance markets competition can destroy the market rather than make it work better. One of the dimensions along which insurance companies compete is underwriting--trying to ensure that the risks covered are "good" risks or that if a high risk is insured, the premium charged is at least commensurate with the potential cost. The resulting partitioning of risk limits the amount of insurance that potential insurance customers can buy. In the extreme case, such competitive behavior will destroy the insurance market altogether. A simple model illustrates

Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information

This paper analyzes competitive markets in which the characteristics of the commodities exchanged are not fully known to at least one of the parties to the transaction and suggests that the comforting myth that serious consideration of costs of communication, imperfect knowledge, and the like complicate without informing is false. Some of the most important conclusions of economic theory are not robust to considerations of imperfect information. We are able to show that not only may a competitive equilibrium not exist, but when equilibria do exist, they may have strange properties

Correlated radio--X-ray variability of Galactic Black Holes: A radio--X-ray flare in Cygnus X-1

We report on the first detection of a quasi-simultaneous radio-X-ray flare of Cygnus X-1. The detection was made on 2005 April 16 with pointed observations by the Rossi X-ray Timing Explorer and the Ryle telescope, during a phase where the black hole candidate was close to a transition from the its soft into its hard state. The radio flare lagged the X-rays by approximately 7 minutes, peaking at 3:20 hours barycentric time (TDB 2453476.63864). We discuss this lag in the context of models explaining such flaring events as the ejection of electron bubbles emitting synchrotron radiation.Comment: 4 pages, 4 figure

Stochastic Capital Theory I. Comparative Statics

Introductory lectures on capital theory often begin by analyzing the following problem: I have a tree which will be worth X(t) if cut down at time t. If the discount rate is r, when should the tree be cut down? What is the present value of such a tree? The answers to these questions are straightforward. Since at time t a tree which I plan to cut down at time T is worth e[to the power of rt]e[to the power of ?rT]X(T), I should choose the cutting date T* to maximize e[to the power of -rT]X(T); at t