The Welfare Effects of Discrimination in Insurance

Tinbergen Institute Discussion Paper No. TI 06-012/1

16 Pages Posted: 21 Jan 2006 Last revised: 10 Dec 2008

See all articles by Rob van der Noll

Rob van der Noll

Authority for Consumers & Markets (ACM)

Francesco Paolucci

Australian Centre for Economic Research on Health (ACERH-ANU) & Health Policy and Management (iBMG-EUR)

Date Written: December 1, 2008

Abstract

We study an insurance model characterized by a continuum of risk types, private information and a competitive supply side. We use the model to investigate the welfare effects of discrimination (also known as risk selection). We postulate that a test is available that determines whether an applicant's risk exceeds a threshold. Excluding the highest risks softens adverse selection, but constitutes a welfare loss for the high risks. In contrast to a lemons market intuition, we find that aggregate surplus decreases when risk aversion is high. When risk aversion is low however, discrimination increases aggregate surplus.

Keywords: insurance, adverse selection, risk selection, discrimination

JEL Classification: D82, K29

Suggested Citation

van der Noll, Rob and Paolucci, Francesco, The Welfare Effects of Discrimination in Insurance (December 1, 2008). Tinbergen Institute Discussion Paper No. TI 06-012/1, Available at SSRN: https://ssrn.com/abstract=877291 or http://dx.doi.org/10.2139/ssrn.877291

Rob Van der Noll (Contact Author)

Authority for Consumers & Markets (ACM) ( email )

Muzenstraat 41
Den Haag, 2511 WB
Netherlands
+31 70 7222581 (Phone)

Francesco Paolucci

Australian Centre for Economic Research on Health (ACERH-ANU) & Health Policy and Management (iBMG-EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands
0031104088535 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
77
Abstract Views
869
rank
373,763
PlumX Metrics