Insurance, Pooling, and Resistance to Reform: The Case of Individual Uncertainty

Abstract

This paper shows that individual risk-type uncertainty can prevent reforms of the insurance system that would benefit the majority of individuals. We consider the case where a subset of the population is uncertain of their risk type and contrast two insurance regimes the status quo of mandated pooling of all risk types and the reform proposal being insurance with risk-type separation over time, using Bayesian updating. Most individuals would benefit from the reform since their risk type is better than the average but the reform does not occur due to individual uncertainty.individual uncertainty