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

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Casey Rothschild

Wellesley College

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

Suggested Citation

Dionne, Georges and Rothschild, Casey, Risk Classification and Health Insurance (August 20, 2012). Encyclopedia of Health Economics vol 3, 272-280, 2014, Available at SSRN: https://ssrn.com/abstract=2134190 or http://dx.doi.org/10.2139/ssrn.2134190

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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