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Public Economics. Explain why insurance companies, even in perfect competition are able to charge an above...

Public Economics. Explain why insurance companies, even in perfect competition are able to charge an above actuarially.

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Answer #1

Actuarially fair premium is that premium at which expected net payoff is zero. Alternatively it is that premium at which profit of insurance company is zero. It means that fair premium is the minimum premium at which insurance company would be willing to sell policy. It is not necessary that people will not buy insurance if premium is greater than the acturially fair premium. If payoff of people is greater than the premium than person will purchase the insurance otherwise does not.

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