Insurance contract and low compensation time——Pareto improvement of traditional partial insurance contract

Adverse selection has a serious effect upon the exchange efficiency of the insurance market,this has not been solved completely until now.As a trial can screen the quality of old cars in second hand car market,in this paper we discuss insurers of two and more risk types with respect to a policy holder action.An insurance contract model with low initial compensation is established.It puts forward that this low compensation period can be used to screen policy holders' risk types.Insurance contracts with low compensation time means that during the start of the signing the contract,if the policy holder runs into risk,the insurance company will give low compensation.On the other hand,if no claims are made during this period,then,until the end of the insured time,the insurance company will provide a fully insured contract.In this condition of partial insurance,it is shown that during the low compensation period the probability of obtaining low compensation is larger if a high risk policy holder accepts the insurance contract and vice versa.This results in high risk policy holders tending to give up the contract.An example is given to show this condition existed in reality and we demonstrate a Pareto improvement to the traditional partial insurance contract.