Adverse selection spirals

Piet de Jong*, Shauna Ferris

*Corresponding author for this work

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

This article discusses risk classification and develops and discusses a framework for estimating the effects of restrictions on risk classification. It is shown that expected losses due to adverse selection depend only on means, variances and covariances of insurance factors and rates of uptake of insurance. Percentage loadings required to avoid losses are displayed. Correlated information, such as family history, is also incorporated and it is seen how such information limits losses and decreases required loadings. Although the evidence suggests that adverse selection is not, at present, a severe problem for insurers, this might change if the authorities impose restrictions on risk classification and/or customers gain an informational advantage (such as better knowledge of their own risk levels). Application is made to unisex annuity pricing in the UK insurance market.

Original languageEnglish
Pages (from-to)589-628
Number of pages40
JournalASTIN Bulletin
Volume36
Issue number2
DOIs
Publication statusPublished - Nov 2006

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