Mitigating Adverse Selection Through Multi-Peril Insurance Policies

The objective of this paper is to pursue an intuitive idea: For a consumer who is an unfavorable health risk but a “better risk” regarding a second peril, would a multi-peril policy not be associated with a reduced selection effort on the part of the insurer? If this intuition should be confirmed, it could serve to mitigate the decade-long concern with risk selection. A two-perils model is developed in which consumers deploy costly effort in search of a policy offering them maximum coverage at the going premium while insurers deploy costly selection effort. Two types of Nash equilibria are compared, one where the insurer is confronted with high-risk and low-risk types as usual and another one where both types are a “better risk” regarding a second peril. The difference in the insurer´s selection effort directed at high-risk and low-risk types is indeed found to be reduced in the latter case