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Adverse Selection Spirals

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  • Jong, Piet De
  • Ferris, Shauna

Abstract

This article discusses risk classification and develops and discusses a framework for estimating the effects of restrictions on risk classification. It is shown that expected losses due to adverse selection depend only on means, variances and covariances of insurance factors and rates of uptake of insurance. Percentage loadings required to avoid losses are displayed. Correlated information, such as family history, is also incorporated and it is seen how such information limits losses and decreases required loadings. Although the evidence suggests that adverse selection is not, at present, a severe problem for insurers, this might change if the authorities impose restrictions on risk classification and/or customers gain an informational advantage (such as better knowledge of their own risk levels). Application is made to unisex annuity pricing in the UK insurance market.

Suggested Citation

  • Jong, Piet De & Ferris, Shauna, 2006. "Adverse Selection Spirals," ASTIN Bulletin, Cambridge University Press, vol. 36(2), pages 589-628, November.
    • Handle: RePEc:cup:astinb:v:36:y:2006:i:02:p:589-628_01
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    Cited by:

    1. R. Guy Thomas, 2008. "Loss Coverage as a Public Policy Objective for Risk Classification Schemes," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 997-1018, December.
    2. Hao, MingJie & Macdonald, Angus S. & Tapadar, Pradip & Thomas, R. Guy, 2018. "Insurance loss coverage and demand elasticities," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 15-25.
    3. Susanna Kochskämper, 2011. "Der Einfluss der Europäischen Union auf die Finanzierung der Gesundheitsversorgung in den Mitgliedstaaten," Otto-Wolff-Institut Discussion Paper Series 03/2011, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.

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