Mortgage life insurance: a rationale for a time limit in switching rights (Q475324)

The author examines the periodic switching right (PSR) by which the borrower can change his insurer once per year (or some other period). The PSR is likely to lead to lower premium but also to excessive segmentation. So, the main theoretical prediction is that, in equilibrium, everyone will pay every year a premium reflecting his current risk, but not covering future risk evolution. The trade-off is between lower price for insurance and lower quality of insurance. This destruction of insurance is not appreciated by consumers. The author simulates the cost of PSR and finds about 5--15\% of the total insurance cost which is slightly smaller than the benefit expected from increased competition. The conclusion is that a switching right limited in time would bring the benefits of competition and avoid most of the cost of segmentation.