MONOPOLY INSURANCE UNDER ADVERSE SELECTION WHEN AGENTS DIFFER IN RISK-AVERSION

This paper considers a profit maximizing monopolistic insurer who offers insurance to two types of risk averse agents in an environment where the uninsured position has the same distribution across types, agents' utility functions are private information, and types are independently and identically distributed. We prove that if there is no lower bound on liability and the types differ markedly in their attitudes to heavy losses, the insurer can extract almost all rent by offering full insurance to agents who are more risk averse and two-valued partial insurance to the others. Under limited liability, separating insurance contracts have a similar structure but it may be impossible to approximate the first best. Unless the uninsured position is supported by two atoms, insurance is provided to all agents. (C) 1994 Academic Press, Inc.