It is well known that consumers have difficulty in dealing with low-probability, high-loss events. Frequently they fail to obtain insurance against such losses, even when the terms are very favorable. (Kunreuther 1997; Phelps, 1997, pp. 409-410, referring to “upside down” private insurance coverage to supplement Medicare). One obvious characterization of such behavior is that it represents non-...

Health insurers face financial risks when they assume liability for the difference between difference between premium revenues and their estimates of future claims costs for a group. Market reform proposals vastly increase the amount of risk health plans of all types will face. A case study is used to show how insurers bidding in an alliance environment must either commit contingency reserves t...