Insurance Markets When Firms Are Asymmetrically Informed: A Note

We examine the welfare effect of the presence of a single well-informed insurance firm in a competitive insurance market populated by uninformed firms. We show that the effect depends on the structure of the market. If competitive insurers rely on the standard self-selection mechanism of a menu of contracts, then the presence of a single wellinformed firm which can discriminate costlessly between consumer risk types increases welfare. In contrast, if consumers do not know their risk type, then the well-informed insurer reduces welfare.