Economic Notes

  • Given an insurance premium and a clever person with public data, you could determine the margin over the risk premium of the insurance. This would require understanding the relevant risk statistics, benefit payments, and asset returns. One could make reasonable assumptions to determine this.
  • A economic problem is information asymmetry. In the case of insurance, there are different sets of information that are asymmetric. In health and life, a person knows better than a company maybe able to glean from whatever data they have available. A large company can work out ways of determining and minimizing adverse selection.
  • In car insurance, the seller has a significant advantage in understanding the failure rate and cost of car parts. In this case, the buyer is at a significant disadvantage in determining real value of the insurance.
  • A competitive environment allows for a buyer to estimate the real value of something by comparing prices between sellers. Sellers will try as best as possible to limit their profit margins in order to sell the product against others. This provides a signal to the buyer to determine the real value of the product and make an informed and rational decision.
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