1. Dynamic Adverse Selection The good risks drop out.

2. Static adverse selection Asymmetric information Hidden values (moral hazard was hidden actions)

3. Term life insurance churning  Churning: shifting a client from one life insurance policy to another.  Generates commissions, which are largest in first years of a policy.  Sacrifices cash values of client.  “Cutthroat competition”

4. 1990 Life Insurance Fact Book p.122

6. Variable premium term  Insured amount stays constant.  Premium rises over time  10-year Select Preferred Risk Only Nonsmoker $250,000 Band. $25 Policy Fee.

7. Some insurance rates, dollars per year, per thousand dollars of coverage. Question: Why is year 1 for age 35 less than year 10 (11) for age 25?

8. Answer: Dynamic Adverse Selection  As time passes, some insureds have negative health events.  They, the bad risks, stay in the pool.  Good risks tend to drop out to join other pools or to be uninsured  The quality of the pool declines.

9. Tuition Postponement Option.  Yale, 1971-1978  Receive tuition loan, pay off with fraction of earnings.  Group retirement of debt.  0.4% of income per $1000 borrowed.  For up to 35 years.

10. Allegation of adverse selection  Adverse selection: the parsons and drug heads entered the plan disproportionately.  (the steady, high-earning types didn’t join)

11. My opinion: mismanagement  15% simply refuse to pay.  Because it is a group plan, the others must make up the difference.  No incentive for Yale to pursue the deadbeats.  But as trustees they should be obliged to do so.

12. 1840’s, Nebraska  Bank deposit liability guarantee association.  Assessable mutual of about 50 firms.  Prevents bank runs.  Does not insure bank investors.

13. 1840’s, Nebraska  Runs spread from bank to bank. One bank runs another.  Free-rider problem: better to be outside the association, but still safe from runs.  Membership is valuable as an advertisement for marginal banks

14. 1840’s, Nebraska  Success for a time, then…  Some banks get in trouble.  The best banks leave the guarantee association.  Slow process, over several years, the association falls apart.

15. 1980’s, US  Savings banks (S&L’s) were part of a Federal Deposit Insurance plan to guarantee deposit liabilities.  Under the Federal Home Loan Bank Board.  Threatened to raise premiums.

16. 1980’s, U.S.  S&L’s tried to recharter as banks or as state-chartered S&L’s.  The good S&L’s (the bad one’s couldn’t recharter).

17. Summary  Equal risks join the pool, through careful underwriting.  Events occur, making some risks better, some worse.  Good risks (tend to) drop out of insurance pools and similar activities.