Insurance theory and social security.

Summary The validity of the utility expectation principle is considered in its application to the economics of insurance. The main results of the theory of insurance demand, in the presence of a single risk, are demonstrated in a simplified context. Several contradictory experiments on insurance choices are identified. However, it is shown that for a consumer faced with two insurable risks, the preference for insuring small frequent losses and over-insuring in actuarially unfavorable terms are no longer paradoxical. The theory of insurance markets in the presence of adverse selection highlights the deficiencies of market regulation. The application of this theory to social security legitimizes compulsory insurance systems. Redistribution then results from asymmetric information. It is shown that in insurance markets with asymmetric information, any second-best optimum can be achieved through a two-stage insurance mechanism. The first is compulsory partial insurance with the same price and benefits for all, and redistribution across risk classes. The second is supplementary coverage at an actuarial price for each type of risk. In this context, as soon as public insurance coverage exceeds a certain threshold, the existence and efficiency of this two-stage equilibrium is guaranteed. The analysis is extended to the classification of risks.