78 Pages Posted: 26 Aug 2003
Date Written: July 31, 2003
Adverse selection is the process by which insureds who know their own risk of loss take advantage of this information to choose insurance coverage in a way that works to the detriment of their insurer. This paper demonstrates that the views of law and economics scholars studying insurance, as well as policy makers and judges, have been shaped by a fear of adverse selection, a fear that I claim is overstated. After documenting the existence of these fears, I demonstrate that the empirical basis for the importance of adverse selection is limited, the economic theory underlying the phenomenon is not robust, and that there are alternative plausible theories of insureds' behavior that lead to startlingly different results. Adverse selection does sometimes occur, but it has cast too large a shadow on insurance law and regulation.
Suggested Citation: Suggested Citation
Siegelman, Peter, Adverse Selection in Insurance Markets: An Exaggerated Threat (July 31, 2003). Fordham School of Law, Pub-Law Research Paper No. 27. Available at SSRN: https://ssrn.com/abstract=434604 or http://dx.doi.org/10.2139/ssrn.434604