Asymmetric Information, Self‐Selection, and Pricing of Insurance Contracts: The Simple No‐Claims Case

23 Pages Posted: 25 Nov 2014

See all articles by Catherine Donnelly

Catherine Donnelly

Heriot-Watt University

Martin Englund

Codan Insurance

Jens Perch Nielsen

City University London - Cass Business School

Carsten Tanggaard

affiliation not provided to SSRN

Date Written: December 2014

Abstract

This article presents an optional bonus‐malus contract based on a priori risk classification of the underlying insurance contract. By inducing self‐selection, the purchase of the bonus‐malus contract can be used as a screening device. This gives an even better pricing performance than both an experience rating scheme and a classical no‐claims bonus system. An application to the Danish automobile insurance market is considered.

Suggested Citation

Donnelly, Catherine and Englund, Martin and Nielsen, Jens Perch and Tanggaard, Carsten, Asymmetric Information, Self‐Selection, and Pricing of Insurance Contracts: The Simple No‐Claims Case (December 2014). Journal of Risk and Insurance, Vol. 81, Issue 4, pp. 757-780, 2014. Available at SSRN: https://ssrn.com/abstract=2530248 or http://dx.doi.org/10.1111/j.1539-6975.2013.01520.x

Catherine Donnelly

Heriot-Watt University ( email )

Riccarton
Edinburgh EH14 4AS, Scotland EH14 1AS
United Kingdom

Martin Englund

Codan Insurance ( email )

Gammel Kongevej 60
Copenhagen, DK-1790
Denmark
+45 33 55 26 64 (Phone)
+45 33 55 21 22 (Fax)

Jens Perch Nielsen

City University London - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Carsten Tanggaard

affiliation not provided to SSRN

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