Risk Classification and Health Insurance
Encyclopedia of Health Economics vol 3, 272-280, 2014
16 Pages Posted: 23 Aug 2012 Last revised: 5 Jan 2023
Date Written: August 20, 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. With perfect risk classification, premiums fully reflect the expected cost associated with each class of risk characteristics and yield efficient outcomes. In the health sector, risk classification is also subject to concerns about social equity and potential discrimination. We present an analytical framework that illustrates the potential trade-off between efficient insurance provision and social equity. We also review empirical studies on risk classification and residual asymmetric information that inform this trade-off.
Keywords: Adverse selection, Classification risk, Distributional equity, Empirical test, Ex-ante efficiency, Financial equity, Group equity, Horizontal equity, Insurance rating, Interim efficiency, Moral hazard, Risk characteristic, Risk classification, Risk pooling, Risk separation, Social Equity
JEL Classification: D82, I13, I14, I18, I38, G22
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