Incentive-compatible guaranteed renewable health insurance premiums

Bradley Herring, Mark V. Pauly

Research output: Contribution to journalArticlepeer-review

36 Scopus citations


Theoretical models of guaranteed renewable insurance display front-loaded premium schedules. Such schedules both cover lifetime total claims of low-risk and high-risk individuals and provide an incentive for those who remain low-risk to continue to purchase the policy. Questions have been raised of whether actual individual insurance markets in the US approximate the behavior predicted by these models, both because young consumers may not be able to "afford" front-loading and because insurers may behave strategically in ways that erode the value of protection against risk reclassification. In this paper, the optimal competitive age-based premium schedule for a benchmark guaranteed renewable health insurance policy is estimated using medical expenditure data. Several factors are shown to reduce the amount of front-loading necessary. Indeed, the resulting optimal premium path increases with age. Actual premium paths exhibited by purchasers of individual insurance are close to the optimal renewable schedule we estimate. Finally, consumer utility associated with the feature is examined.

Original languageEnglish (US)
Pages (from-to)395-417
Number of pages23
JournalJournal of health economics
Issue number3
StatePublished - May 2006
Externally publishedYes


  • Guaranteed renewability
  • Health insurance
  • Risk classification

ASJC Scopus subject areas

  • Health Policy
  • Public Health, Environmental and Occupational Health


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