The consequences for a monopolistic insurance firm of evaluating risk better than customers: The adverse selection hypothesis reversed

This article models a situation in which a monopolistic insurer evaluates r isk better than its customers. The resulting equilibrium allocations are co mpared to the consequences of the standard adverse selection hypothesis. On the positive side, they exhibit the property that low-risk people are bett er covered than higher-risk people. On the normative side, the article show s that there are two reasons for avoiding excessive risk classification: on e is the classical destruction of insurance possibilities, and the other co mes from the distrustful atmosphere generated by new asymmetric information .