Unobserved Heterogeneity, Experience Rating, and Insurance Demand
52 Pages Posted: 16 Nov 2012 Last revised: 4 Jan 2017
Date Written: December 31, 2016
Using data on claims experience in auto and home insurance, we estimate the variance-covariance matrix of unobserved heterogeneity in claim risk and explore how the demand for coverage would respond to multiline experience rating under different theories of risky choice. Our analysis sheds light on the potential for unpriced heterogeneity to distort the demand for insurance.
Keywords: claim rates, experience rating, insurance law, risk type, unobserved heterogeneity
JEL Classification: C58, D12, D82, G22, K23
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