Economic Effects of Risk Classification Bans

The Geneva Risk and Insurance Review 39, 184-221, 2014

42 Pages Posted: 9 Jul 2014 Last revised: 5 Jan 2023

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Casey Rothschild

Wellesley College

Date Written: June 18, 2014

Abstract

Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, to compute the corresponding premiums, and thereby to reduce asymmetric information. Permitting risk classification may reduce informational asymmetry-induced adverse selection and improve insurance market efficiency. It may also have undesirable equity consequences and undermine the implicit insurance against reclassification risk which legislated restrictions on risk classification could provide. We use a canonical insurance market screening model to survey and to extend the risk classification literature. We provide a unified framework for analyzing the economic consequences of legalized vs. banned risk classification, both in static-information environments and in environments in which additional information can be learned, by either side of the market, through potentially costly tests.

Keywords: Adverse selection, Classification risk, Classification bans, Equity, Efficiency.

JEL Classification: D82, I13, I14, I18, I38, G22.

Suggested Citation

Dionne, Georges and Rothschild, Casey, Economic Effects of Risk Classification Bans (June 18, 2014). The Geneva Risk and Insurance Review 39, 184-221, 2014, Available at SSRN: https://ssrn.com/abstract=2463418 or http://dx.doi.org/10.2139/ssrn.2463418

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Casey Rothschild

Wellesley College ( email )

106 Central St.
Wellesley, MA 02181
United States

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