This paper describes forms of risk sharing between insurers and the regulator in a
competitive individual health insurance market with imperfectly risk-adjusted capitation
payments. Risk sharing implies a reduction of an insurer's incentives for selection as well as
for efficiency. In a theoretical analysis, we show how the optimal extent of risk sharing may
depend on the weights the regulator assigns to these effects. Some countries employ outlier
or proportional risk sharing as a supplement to demographic capitation payments. Our …