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Community Rating and Equalisation1

Published online by Cambridge University Press:  29 August 2014

Walther Neuhaus
Walther Neuhaus*
Affiliation:
University of Copenhagen and MIRA Consultants Ltd.(Sydney)
*
Laboratory of Actuarial Mathematics, University of Copenhagen, Universitetsparken 5, DK-2100 Copenhagen Ø
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Abstract

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Several countries have made community rating mandatory for certain lines of insurance, particularly health insurance. This paper offers a theoretical solution to the problem of designing equalisation schemes to support community rating in a market where different insurers are selling different benefit plans. The criterion chosen is that an equalisation scheme should minimise the opportunities for arbitrage between insurers, which community rating otherwise would generate. Several possible measures of arbitrage are presented, and the optimal schemes are compared against data from Australian health insurers. Finally, the approach is extended to partial community rating, for example unisex rating.

Keywords

ArbitrageCommunity ratingCredibility theoryEqualisationHealth insuranceRisk adjustment
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 25 , Issue 2 , November 1995 , pp. 95 - 118
Copyright
Copyright © International Actuarial Association 1995

Footnotes

1

Paper presented at the Oberwolfach Conference on Risk Theory, 18th to 24th September 1994.

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