Adverse Selection With Frequency and Severity Risk: Alternative Risk-Sharing Provisions

The analysis considers an insurance market with adverse selection where individuals' loss distributions may differ with respect to both the frequency and severity of loss. We show that the combination of deductibles and coinsurance can be used to sort rationed policyholders. Because of their screening properties, coinsurance and deductibles may both be equilibrium forms of risk sharing for a particular insurer facing asymmetric information, with different rationed consumers choosing different risk-sharing provisions.