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Adverse Selection Spirals

Published online by Cambridge University Press:  17 April 2015

Piet De Jong  and
Shauna Ferris
Piet De Jong
Affiliation:
Department of Actuarial Studies, Macquarie University, NSW 2109, Australia. Email: [email protected]
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Abstract

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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.

Keywords

Adverse selectiongenetic testingpremium loadinginsurance demandequilibrium pricingunisex pricing
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 36 , Issue 2 , November 2006 , pp. 589 - 628
Copyright
Copyright © ASTIN Bulletin 2006

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