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A note on loadings and deductibles: can a vicious circle arise?

Luciano, elisa (1999): A note on loadings and deductibles: can a vicious circle arise? Published in: scandinavian actuarial journal No. 2 (1999): pp. 157-169.

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Abstract

In a recently reprinted paper Borch wonders whether an increase in loadings, together with a consequent increase in deductibles, may start a vicoius circle, ad infinitum. This paper rules out the possibility of a vicious circle, in a model à la Borch. First of all, in his setting, increases in costs are not necessarily followed by increases in loadings. Second, increases in loadings are not necessarily followed by increases in deductibles, since in equilibrium insurance may be Giffen. Third, loadings do not increase with deductibles, because the only viable equilibrium is a Stackelberg one.

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