Optimal medical insurance coverage in incomplete markets

[[abstract]]This paper studies the optimal insurance coverage of an individual under three different types of medical insurance market incompleteness: (1) the presence of an uninsurable background risk,(2) the possibility of the insurer's default, and (3) the uninsurability of the insured's health condition. While the effects of the background risk and the default risk on insurance coverage have been studied in the literature, the effect of the uninsurability of an individual's health condition has received little attention. The possibility that no medical expenditure is incurred with non-trivial probability is explicitly considered. This paper points out that, while using the coinsurance rate of one as the definition of "full-insurance coverage" works well under the first and third types of market incompleteness, a more appropriate definition called"full-insurance on average" should be used under default risk. The conditions under which full-insurance on average is or is not optimal are derived for each type of market incompleteness. By employing the"regressibility assumption" used in the literature of indirect hedging of exchange rate risk, this paper obtains results which are parsimonious and provide intuitive explanations to some of the ambiguous results in the literature.[[sponsorship]]中央研究院經濟研究所[[notice]]補正完畢[[conferencetype]]國際[[conferencedate]]19990325~19990325[[booktype]]紙本[[iscallforpapers]]Y[[conferencelocation]]臺北市, 臺