Heterogeneity, Demand for Insurance and Adverse Selection PDF Download
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Author: Johannes Spinnewijn
Publisher:
ISBN:
Category : Demand (Economic theory)
Languages : en
Pages : 0
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Book Description
Recent empirical work finds that surprisingly little variation in the demand for insurance is explained by heterogeneity in risks. I distinguish between heterogeneity in risk preferences and risk perceptions underlying the unexplained variation. Heterogeneous risk perceptions induce a systematic difference between the revealed and actual value of insurance as a function of the insurance price. Using a sufficient statistics approach that accounts for this alternative source of heterogeneity, I find that the welfare conclusions regarding adversely selected markets are substantially different. The source of heterogeneity is also essential for the evaluation of different interventions intended to correct inefficiencies due to adverse selection like insurance subsidies and mandates, risk-adjusted pricing and information policies.
Author: Johannes Spinnewijn
Publisher:
ISBN:
Category : Demand (Economic theory)
Languages : en
Pages : 0
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Book Description
Recent empirical work finds that surprisingly little variation in the demand for insurance is explained by heterogeneity in risks. I distinguish between heterogeneity in risk preferences and risk perceptions underlying the unexplained variation. Heterogeneous risk perceptions induce a systematic difference between the revealed and actual value of insurance as a function of the insurance price. Using a sufficient statistics approach that accounts for this alternative source of heterogeneity, I find that the welfare conclusions regarding adversely selected markets are substantially different. The source of heterogeneity is also essential for the evaluation of different interventions intended to correct inefficiencies due to adverse selection like insurance subsidies and mandates, risk-adjusted pricing and information policies.
Author: David M. Cutler
Publisher:
ISBN:
Category : Insurance
Languages : en
Pages : 19
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Book Description
Standard theories of insurance, dating from Rothschild and Stiglitz (1976), stress the role of adverse selection in explaining the decision to purchase insurance. In these models, higher risk people buy full or near-full insurance, while lower risk people buy less complete coverage, if they buy at all. While this prediction appears to hold in some real world insurance markets, in many others, it is the lower risk individuals who have more insurance coverage. If the standard model is extended to allow individuals to vary in their risk tolerance as well as their risk type, this could explain why the relationship between insurance coverage and risk occurrence can be of any sign, even if the standard asymmetric information effects also exist. We present empirical evidence in five difference insurance markets in the United States that is consistent with this potential role for risk tolerance. Specifically, we show that individuals who engage in risky behavior or who do not engage in risk reducing behavior are systematically less likely to hold life insurance, acute private health insurance, annuities, long-term care insurance, and Medigap. Moreover, we show that the sign of this preference effect differs across markets, tending to induce lower risk individuals to purchase insurance in some of these markets, but higher risk individuals to purchase insurance in others. These findings suggest that preference heterogeneity may be important in explaining the differential patterns of insurance coverage in various insurance markets.
Author: Tsvetanka Karagyozova
Publisher:
ISBN:
Category :
Languages : en
Pages : 264
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Book Description
Author: Guy Thomas
Publisher: Cambridge University Press
ISBN: 110815834X
Category : Business & Economics
Languages : en
Pages : 285
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Book Description
Most academic and policy commentary represents adverse selection as a severe problem in insurance, which should always be deprecated, avoided or minimised. This book gives a contrary view. It details the exaggeration of adverse selection in insurers' rhetoric and insurance economics, and presents evidence that in many insurance markets, adverse selection is weaker than most commentators suggest. A novel arithmetical argument shows that from a public policy perspective, 'weak' adverse selection can be a good thing. This is because a degree of adverse selection is needed to maximise 'loss coverage', the expected fraction of the population's losses which is compensated by insurance. This book will be valuable for those interested in public policy arguments about insurance and discrimination: academics (in economics, law and social policy), policymakers, actuaries, underwriters, disability activists, geneticists and other medical professionals.
Author: David M. Cutler
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Book Description
Standard theories of insurance, dating from Rothschild and Stiglitz (1976), stress the role of adverse selection in explaining the decision to purchase insurance. In these models, higher risk people buy full or near-full insurance, while lower risk people buy less complete coverage, if they buy at all. While this prediction appears to hold in some real world insurance markets, in many others, it is the lower risk individuals who have more insurance coverage. If the standard model is extended to allow individuals to vary in their risk tolerance as well as their risk type, this could explain why the relationship between insurance coverage and risk occurrence can be of any sign, even if the standard asymmetric information effects also exist. We present empirical evidence in five difference insurance markets in the United States that is consistent with this potential role for risk tolerance. Specifically, we show that individuals who engage in risky behavior or who do not engage in risk reducing behavior are systematically less likely to hold life insurance, acute private health insurance, annuities, long-term care insurance, and Medigap. Moreover, we show that the sign of this preference effect differs across markets, tending to induce lower risk individuals to purchase insurance in some of these markets, but higher risk individuals to purchase insurance in others. These findings suggest that preference heterogeneity may be important in explaining the differential patterns of insurance coverage in various insurance markets.
Author: Amy Finkelstein
Publisher:
ISBN:
Category : Adverse selection (Insurance)
Languages : en
Pages : 35
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Book Description
This paper proposes a new test for adverse selection in insurance markets based on observable characteristics of insurance buyers that are not used in setting insurance prices. The test rejects the null hypothesis of symmetric information when it is possible to find one or more such "unused observables" that are correlated both with the claims experience of the insured and with the quantity of insurance purchased. Unlike previous tests for asymmetric information, this test is not confounded by heterogeneity in individual preference parameters, such as risk aversion, that affect insurance demand. Moreover, it can potentially identify the presence of adverse selection, while most alternative tests cannot distinguish adverse selection from moral hazard. We apply this test to a new data set on annuity purchases in the United Kingdom, focusing on the annuitant's place of residence as an "unused observable." We show that the socio-economic status of the annuitant's place of residence is correlated both with annuity purchases and with the annuitant's prospective mortality. Annuity buyers in different communities therefore face different effective insurance prices, and they make different choices accordingly. This is consistent with the presence of adverse selection. Our findings also raise questions about how insurance companies select the set of buyer attributes that they use in setting policy prices. We suggest that political economy concerns may figure prominently in decisions to forego the use of some information that could improve the risk classification of insurance buyers.
Author: Paolo Belli
Publisher: World Bank Publications
ISBN:
Category : Adverse selection (Insurance)
Languages : en
Pages : 38
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Book Description
There may be a price to pay (in terms of inefficient coverage) if competition among health insurers is encouraged as a way to give patients greater choice and to achieve better control over insurance providers.
Author: William J. Congdon
Publisher: Brookings Institution Press
ISBN: 0815704984
Category : Business & Economics
Languages : en
Pages : 260
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Book Description
Argues that public finance--the study of the government's role in economics--should incorporate principles from behavior economics and other branches of psychology.
Author: Michael Geruso
Publisher:
ISBN:
Category : Adverse selection (Insurance)
Languages : en
Pages : 60
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Book Description
In many markets insurers are barred from price discrimination on consumer characteristics like age, gender, and medical history. By themselves, such restrictions are known to exacerbate adverse selection problems. But the conventional wisdom -- widely reflected in policy -- is that with regulatory tools like premium subsidies, it is possible to address selection and induce efficient plan choices without price-discriminating. In this paper, I show why this conventional wisdom is wrong: As long as different sets of consumers (men and women, rich and poor, young and old) differ in their willingness-to-pay for insurance conditional on the losses they generate, then price discrimination across such groups is welfare-improving. The conventional wisdom is wrong because it implicitly assumes a one-to-one mapping from insurable risk to insurance valuation. I show that demand heterogeneity that breaks this one-to-one relationship is empirically relevant in a consumer health plan setting. Younger and older consumers and men and women reveal strikingly different demand for health insurance, conditional on their objective medical spending risk. This implies that these groups must face different prices in order to sort themselves efficiently across insurance contracts. The theoretical and empirical analysis highlights a previously unexplored, but fundamental, tradeoff between equity and efficiency that is unique to selection markets.
Author: William Jack
Publisher:
ISBN:
Category : Equilibrium (Economics)
Languages : en
Pages : 48
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Book Description
