Adverse Selection in Insurance Markets: On-Demand Contracts As a Screening Device

We show that on-demand insurance contracts, an innovative form of coverage recently introduced through the InsurTech sector, can serve as a screening device. To this end, we develop a new adverse selection model consistent with Wilson (1977), Miyazaki (1977) and Spence (1978). Consumers have private information on their risk profile and the frequency with which they activate coverage. We show that the emergence of on-demand providers alters known market equilibria as low-frequency users are drawn away from the standard policy, receiving more coverage. Thus, the new equilibrium exhibits a higher utilitarian welfare. Our theoretical predictions are supported by additional experimental evidence.