Risk Classification in Insurance Contracting
51 Pages Posted: 12 Nov 2011 Last revised: 22 Aug 2012
Date Written: April 24, 2012
Abstract
Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, compute the corresponding premiums, and thereby reduce asymmetric information. Risk classification can be used to mitigate adverse selection and improve insurance market efficiency, but it may have undesirable equity or efficiency consequences. We employ a canonical screening model of insurance contracting to study these trade-offs in a range of informational environments, and to understand when efficiency or equity concerns are likely to be particularly important. We also review empirical studies on risk classification and residual asymmetric information.
Keywords: Adverse selection, Classification risk, Diagnostic test, Empirical test of asymmetric information, Financial equity, Insurance rating, Insurance pricing, Moral hazard, Risk classification, Risk characteristic, Risk pooling, Risk separation, Social equity
JEL Classification: D80, D82, D86, G22, I11, I18
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market
By Amy Finkelstein and James M. Poterba
-
Estimating Risk Preferences from Deductible Choice
By Alma Cohen and Liran Einav
-
Estimating Risk Preferences from Deductible Choice
By Alma Cohen and Liran Einav
-
The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance
By Igal Hendel and Alessandro Lizzeri
-
Asymmetric Information and Learning: Evidence from the Automobile Insurance Market
By Alma Cohen
-
Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance
-
The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market
By Jeffrey R. Brown and Amy Finkelstein
-
The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market
By Jeffrey R. Brown and Amy Finkelstein
-
Sources of Advantageous Selection: Evidence from the Medigap Insurance Market
By Hanming Fang, Michael P. Keane, ...
-
Sources of Advantageous Selection: Evidence from the Medigap Insurance Market
By Hanming Fang, Michael P. Keane, ...