Top PDF 15. Adverse Selection in Insurance Markets

15. Adverse Selection in Insurance Markets

15. Adverse Selection in Insurance Markets

but not if it is “bad”, so wrong type won’t imitate, pretend to be good. Signaling example – seller offers warranty on car, but is this credible? Screening by self-selection example – restricted fares on airlines We will develop three examples (models) in detail:

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Managing Adverse Selection In Health Insurance Markets: Evidence From The California And Washington Aca Exchanges

Managing Adverse Selection In Health Insurance Markets: Evidence From The California And Washington Aca Exchanges

One of the key mechanisms for expanding health insurance under the ACA is the creation of regulated state insurance exchanges, where insurers sell insurance plans directly to con- sumers. Plans sold on the exchange are classified by their actuarial value (AV), i.e., the expected percentage of health care costs that the insurance plan will cover. The four ac- tuarial value or “metal” tiers are bronze (60 percent AV), silver (70 percent AV), gold (80 percent AV), and platinum (90 percent AV). Select individuals, mostly those under age 30, can buy a more basic catastrophic plan. In most states, insurers can design their plans with different cost sharing parameters (e.g., deductibles, coinsurance rates, copays, etc.), as long as the plans have the advertised AV. One notable exception is California, where plans within a metal tier are standardized to have the cost sharing design specified by the California exchange. The standard benefit designs for the 2014 plan year are shown in Table 2.
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Adverse selection in a community-based health insurance scheme in rural Africa: implications for introducing targeted subsidies

Adverse selection in a community-based health insurance scheme in rural Africa: implications for introducing targeted subsidies

Enrolment in CBHI is voluntary. To limit adverse selec- tion the unit of enrolment is set as a household. In addition, three months waiting period is enforced during which the enrollees are not entitled to receive CBHI benefits. Al- though the unit of enrolment is the household, the annual premium is set on an individual basis: 1500 CFA (2.29€) for an adult and 500 CFA (0.76€) for a child (less than 15 years old). The premium was set based on feasibility and willingness-to-pay (WTP) studies previously conducted in this region [27,28]. The premium for the entire household is paid in one single installment, at the beginning of the year, after the harvest. Membership is renewed yearly. The benefit package includes a wide range of first- and second- line medical services available within the NHD. The en- rolled are asked to seek care at a pre-assigned first-line fa- cility and only if referred they can access services at the District Hospital in Nouna. There are no copayments, deductibles or ceiling on the benefits.
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Health Uninsurance in rural America: a partial equilibrium analysis

Health Uninsurance in rural America: a partial equilibrium analysis

areas. The measurement of adverse selection in these markets has mainly dwelt on the existence of pre- existing health conditions or closely related proxies. To worsen the information asymmetry challenge of the health insurance markets, insurance issuers were prohib- ited from refusing coverage based on patients’ medical history. This made it even more difficult for issuers to understand the extent of risk associated with the pool of customers. These sequences have negatively affected farmers who have been prejudiciously categorized within the high health risk group. However, the law on pre- existing conditions was repealed in 2018 raising further debate as to whether the government cares about the sick or not. To understand and explain the information asymmetry problem in these markets, this study poses and answers two questions, (i) is there evidence of ad- verse selection in rural US health insurance markets if pre-existing conditions are considered as the basis? (ii) does the respondents ’ domain specific risk attitude have similar selection effects as pre-existing conditions?
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Does Selection in Insurance Markets Always Favor Buyers?

Does Selection in Insurance Markets Always Favor Buyers?

The extent to which selection occurs in insurance markets has long been an important empirical question. Tra- ditionally, the focus has been on "adverse" selection, in which higher-risk individuals have more coverage. Adverse selection can lead to large welfare losses and is one of the main economic justifications for mandating insurance cov- erage. More recently, it has been recognized that, in certain cases, selection may be "advantageous," that is, favoring providers. In this case, lower-risk individuals have more coverage. Advantageous selection can arise when individuals who are more risk averse both buy more comprehensive insurance and take more precautions (de Meza and Webb, 2001; De Donder and Hindriks, 2009). Advantageous selection may also be the result of informational asymmetries that favor providers. When the relationships between characteristics and risk are complex, insurers may have an infor- mational advantage over buyers. Specifically, insurers may have better information about the average risk associated with a particular characteristic. The presence of asymmetric information favoring insurers may undo some or all of the effect of asymmetric information that benefits buyers (Seog, 2009; Villeneuve, 2000, 2005).
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Life Insurance: Nudges and Adverse Selection

Life Insurance: Nudges and Adverse Selection

Another potential reason why individuals do not purchase more term coverage is the complexity in comparing the products. Many individuals struggle to correctly an- swer even rudimentary financial questions (Lusardi and Mitchell, 2006, 2007b), which might cause them to incorrectly compare the two coverage options. The most common form of term life insurance is “level term,” which has constant premiums for the life of the policy. Consequently, premiums are inherently front loaded because of inflation and the fact that individual risk increases with age. Therefore, a naive or myopic consumer might compare the premiums in the first year rather than comparing the present value of premiums for the entire policy. In many circumstances, this type of comparison would lead to the incorrect conclusion that supplemental ESLI is cheaper than term life insurance. As education increases, these types of errors could decrease. In Table 2.15, I interact having a graduate degree with the independent variable of interest. The specification that uses annual term premiums does not show adverse selection—those in better health purchasing term life insurance–among federal em- ployees with a graduate degree. However, the specification that uses probability of death does indicate that federal employees with a graduate degree are less likely to purchase term life insurance (more likely to purchase supplemental ESLI) as there probability of death increases. Therefore, there appears to be adverse selection by highly educated federal employees coming from the available substitute of term life insurance, but the finding is sensitive to the specification.
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Testing for Adverse Selection Using Micro Data on Automatic Renewal Term Life Insurance

Testing for Adverse Selection Using Micro Data on Automatic Renewal Term Life Insurance

Hendel and Lizzeri (2003) used data on term life insurance contracts to examine the properties of long-term contracts. They compared the costs 1 of annual premiums for a one-year automatic renewal term life insurance policy, a one-year optional renewal term life insurance policy, and a 20-year premium level term life insurance policy (with a death benefit of $500,000). In the case of the one-year automatic renewal term life insurance policy, it is renewable regardless of the policyholder’s health at the time of renewal. As the mortality rate rises with age, the premium for a policyholder aged 58 is approximately four times higher than when he/she purchased the policy at age 40 ($459). In the case of the one- year optional renewal term life insurance policy, if the policyholder passes the medical exam each year, the premium at age 58 will be only approximately three times the amount paid when they first purchased the policy at age 40 ($370). However, if the policyholder fails the medical examination at age 41, the premiums when the policyholder is 58 years of age will be 15 times that paid when they first purchased the policy at age 40 ($370). The premium levels in the 20-year term life insurance policy are higher when the policyholder enters into it at age 40, at $866. At age 58, however, the policyholder’s premium remains unchanged at $866, regardless of health. Policyholders who pay a high premium in the initial stage of their policy tend to have a low cancellation rate, and the
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Uberrimae Fidei and Adverse Selection: the equitable legal judgment of Insurance Contracts

Uberrimae Fidei and Adverse Selection: the equitable legal judgment of Insurance Contracts

Given the potential for utmost good faith to reduce asymmetric information and therefore adverse selection in insurance markets, and also reduce transaction costs in insurance markets, it would prima facie appear to be the case that courts of law ought to vigorously enforce insurance contracts as a means of improving social welfare (on any normally behaved social welfare function). Additionally, Levine (1998) found that countries which rigorously enforce contracts (generally, not specific to insurance) have better developed banks and, as an exogenous component, higher per capita growth, physical capital accumulation, and productivity growth. Unfortunately, the outcome of an improvement in social welfare through the strict enforcement of insurance contracts, at law, has two necessary conditions:
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Adverse selection in a community based health insurance scheme in rural Africa: Implications for introducing targeted subsidies

Adverse selection in a community based health insurance scheme in rural Africa: Implications for introducing targeted subsidies

Enrolment in CBHI is voluntary. To limit adverse selec- tion the unit of enrolment is set as a household. In addition, three months waiting period is enforced during which the enrollees are not entitled to receive CBHI benefits. Al- though the unit of enrolment is the household, the annual premium is set on an individual basis: 1500 CFA (2.29€) for an adult and 500 CFA (0.76€) for a child (less than 15 years old). The premium was set based on feasibility and willingness-to-pay (WTP) studies previously conducted in this region [27,28]. The premium for the entire household is paid in one single installment, at the beginning of the year, after the harvest. Membership is renewed yearly. The benefit package includes a wide range of first- and second- line medical services available within the NHD. The en- rolled are asked to seek care at a pre-assigned first-line fa- cility and only if referred they can access services at the District Hospital in Nouna. There are no copayments, deductibles or ceiling on the benefits.
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Adverse Selection, Genetic Testing and Life Insurance Lessons from Health Insurance in Australia

Adverse Selection, Genetic Testing and Life Insurance Lessons from Health Insurance in Australia

The 30 per cent rebate for private health insurance premiums coupled with lifetime community rating resulted in an increase in private health insurance coverage from 30.1 per cent in the December quarter 1998 to 45.8 per cent in the September quarter 2000 — an increase of 15.7 percentage points or a 52 per cent increase in coverage. Several estimates of the quantitative impact of the 30 per cent rebate component of these two policies on coverage have appeared. Butler (2002) argues that most of the increase in coverage from the December quarter 1998 to the March 2000 quarter (1.2 percentage points, or a 7 per cent increase in coverage) — and also, perhaps, some of the increase which occurred even after March 2000 — can be attributed to the 30 per cent rebate. While lifetime community rating was announced in September 1999, the main promotional activities concerning the policy were concentrated in the March and June quarters 2000. Frech, Hopkins and MacDonald (2002) argue that the effect of the policy should be confined to 1999 but that the increase in coverage on account of the 30 per cent rebate should be calculated with respect to what coverage would have been at the end of 1999 in the absence of the policy (as opposed to what coverage actually was at the end of 1998). On this basis, they estimate that the 30 per cent rebate gave rise to an 11 per cent increase in coverage. Finally, in response to a question in Parliament regarding the estimated effect of the rebate, the Prime Minister indicated that coverage was expected to increase to 33 per cent (Commonwealth of Australia, 1998:624). This suggests a 2.9 percentage point increase, or a 9.6 per cent increase, in coverage.
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Essays on Private Medicare Insurance Markets

Essays on Private Medicare Insurance Markets

This paper also contributes to a body of literature that empirically investigates adverse selection in insurance markets. Standard models on insurance markets usually predict adverse selection, which means that riskier consumers choose more compre- hensive plans, causing the equilibrium prices of these plans to rise (e.g., Rothschild and Stiglitz 1976). However, previous research often finds evidence against adverse selection. For example, Chiappori and Salanie (2000) do not find evidence for adverse selection in a market for automobile insurance. Moreover, Finkelstein and McGarry (2006) and Fang et al. (2008) find that individuals with lower risks are more likely to purchase long-term care insurance and Medigap, respectively. This pattern of selec- tion is called advantageous selection, and primary reasons for advantageous selection are that an individual’s characteristics other than risks also determine an insurance purchase decision, and that these characteristics are often correlated with risks in a way that results in advantageous selection. Finkelstein and McGarry (2006) and Fang et al. (2008) find that risk aversion and diminished cognitive abilities are such characteristics, respectively. Based on the result on cognitive ability found by Fang et al. (2008), this papers considers a consumer’s search cost and its correlation with health status as an explanation for the observed advantageous selection in the Medi- gap market.
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Essays on markets with asymmetries of information and strategic experimentation

Essays on markets with asymmetries of information and strategic experimentation

Related Literature. My work is related to several strands in the liter- ature. To begin with, the seminal paper on competitive screening markets with adverse selection is Rothschild and Stiglitz [55]. They analyse an in- surance market with adverse selection and show that for some parameter values a “competitive” equilibrium fails to exist. 6 Wilson [59] and Riley [53] place restrictions on the set of possible contracts insurance firms can offer and show that an equilibrium always exists. Miyazaki [45] extends the idea of Wilson [59] to a model where insurance firms can offer menus of contracts (instead of single contracts) and proves that an equilibrium always exists and the equilibrium allocation is always constrained efficient. From those two authors, this allocation is often called the Miyazaki-Wilson (or MW) allocation. Hellwig [29] provides a game-theoretic foundation for the idea of Wilson [59]. Along with the equilibrium allocation of Wilson [59], he shows that there is a continuum of other equilibrium allocations. 7 Engers and Fernadez [20] also propose a game with an infinite number of moves to provide foundations for Riley’s equilibrium allocation. Similarly to Hellwig [29], a continuum of other allocations can be supported as equilbria. An- other strand in the literature that analyses the existence of mixed strategy equilibria in the elementary Bertrand game of Rothschild and Stiglitz [55] is Rosenthal and Weiss [54], and Dasgupta and Maskin [14, 15].
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The Test for Adverse Selection In Life Insurance Market: The Case of Mellat Insurance Company

The Test for Adverse Selection In Life Insurance Market: The Case of Mellat Insurance Company

Adverse selection exists in an insurance market when buyers of insurance have information about their risk that the insurers who underwrite their policies lack and use this information in making their insurance purchases. The policyholder may be better informed about either the probability of a loss, the distribution of the size of the loss in the event that a loss occurs, or both. Although substantial work has been done on adverse selection outside insurance markets, we focus on the insurance context for several reasons. First, the term “adverse selection” itself originated in the context of insurance and the insurance market has been the locale for some of the earliest economic theorizing about it (Arrow (1963), Pauli (1974), Rothschild and Stiglitz (1976)).
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Harmful competition in insurance markets

Harmful competition in insurance markets

We perform this analysis in a non-expected utility framework using the dual theory ap- proach to choice under risk developed by Yaari (1987). It turns out that by using this specifica- tion of individual preferences we are able to provide a clear-cut comparison between monopoly and competition. The dual theory has the property that utility is linear in income, and risk aversion is expressed entirely by a transformation of probabilities in which bad outcomes are given relatively higher weights and good outcomes are given relatively lower weights. In our simple two-state model the probability of bad outcome is weighted up by a loading factor. It would be absurd to suggest that the dual theory provides a better model than the expected utility. The latter has obvious appeal and has provided so many useful results in insurance theory. Nonetheless, we feel there is some gain from studying the properties of our simple non-expected utility model, even if only to derive some clear insights on the efficiency of competition in the presence of adverse selection. 3
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Adverse selection and risk selection in unregulated health insurance markets: Empirical evidence from South Africa's medical schemes

Adverse selection and risk selection in unregulated health insurance markets: Empirical evidence from South Africa's medical schemes

Propper et al. (2001) uses a pseudo-panel cohort derived from repeated cross- sections of the annual UK Family Expenditure Survey 1978-19% to investigate the dynamics of supplementary private medical insurance purchase. The estimated demand models contain variables of age, income, cohort effects and quality of supplied care, allowing for unobserved regional differences and the effect of past purchase. They find that purchase of private health insurance rises with age, but falls across the generations. Older cohorts are less likely to purchase than younger ones. Income is positively associated with purchase. Supply variables affect the purchase of private health insurance, even after controlling for unobserved regional effects. This paper is not focused on identifying selection, but rather on examining determinants of demand for private health insurance in the UK. Thus it does not explicitly conclude selection. The results - that purchases increase with age but decrease with cohort, i.e. older cohorts are (ceteris paribus) less likely to purchase private health insurance - are explained with differences in tastes. Supported by Burchardt and Propper (1999) it is argued that those who use private care are less supportive of the equity goals of the British public health services. However, although the effect of past purchase is significant its magnitude is comparably small (Propper 2001 et al.). It is likely that the results can be interpreted in terms of selection where low risks that can afford private health insurance opt out of the public system.
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Efficiency of competition in insurance markets with adverse selection

Efficiency of competition in insurance markets with adverse selection

Αλτηουγη mοστ οφ τηε χλασσιχαλ ρεσυλτσ ιν ινσυρανχε τηεορψ αππεαρ το βε ροβυστ το συχη δεπαρτυρεσ φροm τηε εξπεχτεδ υτιλιτψ mοδελ, ονε ιmπορταντ ιmπλιχατιον το τηε δεmανδ οφ ινσυρανχε δε[r]

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The Impact of Gender-neutral Pricing on the Life Insurance Industry

The Impact of Gender-neutral Pricing on the Life Insurance Industry

Furthermore, there is speculation that the ban on using age as a risk-rating factor may happen in the future since the EU is currently working on an age and disability directive. As noted, an individual‟s age is by far the most important factor in determining risk profile. The industry fears that this potential ruling will lead to a vicious cycle of increase in premium and a shrink in market size, also known as adverse selection „spiral‟. In theory, a ban on age will make term assurance more attractive to older-age consumers. In order to cover the increased proportion of older-age policyholders, insurers must increase the premium to cover the potential loss. However, this act will cause some of the young-age policyholders to withdraw, leaving behind a higher-proportion of old-age policyholders, and so the process continues to repeat itself.
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Insurance and the Capital Markets *

Insurance and the Capital Markets *

Disintermediation with respect to the transfer of insurance risk is still very much a market in development, unlike in banking where risk transfer to the capital markets through securitization has become a widely used financial technique. Reinsurance will continue to play a dominant role, but gradually we see how innovative securitization instruments are brought to the market, in non-life and in life. The main issues to overcome to make securitization a more widely used financial technique are the lack of transparency and consistency in modelling insurance risks. Enhanced standardization and liquidity will be crucial for the success of insurance risk securitization.
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From Clients to Global Financial Markets. Flood Insurance. Wolfgang Kron Geo Risks Research Munich Reinsurance Company. Topics

From Clients to Global Financial Markets. Flood Insurance. Wolfgang Kron Geo Risks Research Munich Reinsurance Company. Topics

Wolfgang Kron: Flood Insurance Flood Insurance – – From Clients to Global Financial Markets From Clients to Global Financial Markets. Current situation:[r]

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Principal-Agent Relationship in Policy Implementation of the Use of Forest Area for Mining Activity, Indonesia

Principal-Agent Relationship in Policy Implementation of the Use of Forest Area for Mining Activity, Indonesia

In the UFA implementation, moral hazard was not only done by A, but also by P. The collusion practice and gratification indicated in the UFA implementation process. Lack information of A was used by the person who becomes a free rider for profit. In LFAL submission process, A spent transaction costs between 7-15 billion. According [9] self-importanced behavior was not a moral issue. In the organization context, it was normal behavior because an opportunity to do so was available. However, it should be assessed whether it supports the implementation of the UFA policy actually towards forest destruction
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