N°23-49: Risk Classification with On-Demand Insurance

On-demand insurance is an innovative business model from the InsurTech space, which provides coverage for episodic risks. It makes use of a simple fact in a practical way: People differ in their frequency of exposure as well as the probability of loss. The extra dimension of heterogeneity can be used to screen the insured and shifts the utility-possibility frontier outwards. We provide a sufficient condition under which type-specific full insurance at the actuarially fair price is incentive compatible. We also show that our results hold for various real-world implementations of on-demand insurance.