Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation

This article examines whether adverse selection or moral hazard could be induced by rate regulation, which prohibits insurance companies from considering some attributes of drivers in setting premiums. Using an individual data set from a heavily regulated automobile insurance market, we arrived at several conclusions, as follows. First, no evidence of adverse selection or moral hazard is found in general: conditional on all the variables observed by insurer, the null hypothesis of independence between risk and coverage is not rejected at reasonable levels of statistical significance. Second, this result is robust in the sense that it holds under several empirical procedures and different definitions of risk and coverage. Third, we find that unobserved variables do not induce adverse selection: the null hypothesis that consumers in risky regions are more likely to purchase insurance is tested against the alternative and rejected. Our study supports the view that the adverse selection phenomenon exists only to a very limited extent in this market.     

Asymmetric Information Problems in Taiwan's Automobile Insurance Market: The Effect of Policy Design on Loss Characteristics

This article investigates asymmetric information problems for the automobile insurance market in Taiwan. Using panel data for the comprehensive automobile insurance coverage from 1995 to 1999, this article analyzes how types of coverage, deductible amounts, and experience ratings have affected the adverse selection and moral hazard problems in Taiwan's automobile insurance market. The empirical results provide partial evidence to demonstrate that the loss frequency and loss ratio were reduced by the addition of self-selection mechanisms in policies with different levels of coverage. In addition, the deductible amounts, experience ratings, and better control of underwriting and claims processing were shown possibly to have decreased potential losses from adverse selection and moral hazard problems.     

The Asymmetric Information Problem in Taiwan's Cancer Insurance Market

This paper investigates the problem of asymmetric information in Taiwan’s cancer insurance market. Through the survey data, we find evidence of adverse selection existing in this market. Furthermore, we collect additional information on the individual, and find that the individual’s family cancer history contains additional valuable information. It can not only more accurately predict the probability of contracting cancer, as well as predict the willingness to purchase extended cancer insurance, but it can also help to mitigate the severity of adverse selection in the insurance market.     

On the Role of Patience in an Insurance Market With Asymmetric Information

We analyze a two-period competitive insurance market that is characterized by the simultaneous presence of moral hazard and adverse selection with regard to consumer time preferences. It is shown that there exists an equilibrium in which patient consumers use high effort and buy an insurance contract with high coverage, whereas impatient consumers use low effort and buy a contract with low coverage or even remain uninsured. This finding may help to explain why the opposite of adverse selection with regard to risk types can sometimes be observed empirically.     

博弈论视角下我国商业医疗保险市场的信息不对称分析

本文首先建立单阶段静态博弈模型,分析保险公司与医院合作的可能性,说明只有作为委托人的保险公司向医院支付一定补偿金额,医院才有动机控制患者的医疗费用,从而间接实现保险公司的利润目标;其次建立多阶段动态博弈模型进一步分析,指出双方足够的耐心与理性是长期稳定合作的条件。在我国,医疗卫生体制制约了保险公司与医院的耐心与理性,理顺医疗服务体系有助于商业医疗保险健康发展。保险公司尽管可以分别采取措施控制医方和患方的风险,但控制医患合谋的道德风险更加困难。保险公司必须加强自身的诚信建设。     

Incentive Effects of Community Rating in Insurance Markets: Evidence from Massachusetts Automobile Insurance

Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The empirical analysis uses 1990–2003 rating cell-level data from the Massachusetts automobile insurance market, in which regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to be significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.     

Asymmetric Information in the Subprime Mortgage Market

Because of impersonal securitization in the secondary market, the ultimate investors in a mortgage have only a limited amount of information about the borrower??s characteristics. This creates an asymmetric information problem because of hidden knowledge on the part of the primary lenders, who naturally have much better access to this information. This is aggravated by the free rider problem when there are multiple investors. We discuss to what extent the secondary market then seeks to sort the loans to ameliorate this problem and what role reputations play. More importantly, however, the actions of the primary lender in terms of which kinds of loans they choose to approve are partly hidden, and this typical principal-agent situation importantly aggravates the incentive problem. To judge the nature and magnitude of this moral hazard dilemma, we use data to compare how well investors in the secondary mortgage market can predict default given the information they typically have access to as compared to the ability of primary lenders to similarly predict default given the larger set of information they typically will have access to. Finally, the implications of these results are indicated, particularly in light of the recent mortgage crisis.     

Pricing Mortgage Insurance with Asymmetric Jump Risk and Default Risk: Evidence in the U.S. Housing Market

This study provides the valuation of mortgage insurance (MI) considering upward and downward jumps in housing prices, which display separate distributions and probabilities of occurrence, and the mortgage insurer??s default risk. The empirical results indicate that the asymmetric double exponential jump diffusion performs better than the log-normally distributed jump diffusion and the Black-Scholes model, generally used in previous literature, to fit the single-family mortgage national average of all home prices in the US. Finally, the sensitivity analysis shows that the MI premium is an increasing function of the normal volatility, the mean down-jump magnitudes, the shock frequency of the abnormal bad events, and the asset-liability structure of the mortgage insurer. In particular, the shock frequency of the abnormal bad events has the largest effect of all parameters on the MI premium. The asset-liability structure of the mortgage insurer and shock frequency of the abnormal bad events have a larger effect of all parameters on the default risk premium.     

First-Party Versus Third-Party Compensation for Automobile Accidents: Evidence From Canada

Insurance regimes for compensating losses arising from automobile accidents vary by jurisdiction, ranging from a pure tort system to a pure no-fault system, with both systems having well-documented benefits and costs. The majority of published research focuses on the benefits and costs associated with the compensation for bodily injury. This article extends the existing literature by examining the differences between first-party and third-party recovery for both physical damage and bodily injury losses in Canada. Our comparison of auto insurance costs per insured vehicle suggests that government-run, pure no-fault provinces have lower average costs than provinces with private tort and modified no-fault. Lower costs arise from the elimination of tort costs associated with noneconomic damages, lower claims settlement costs due to first-party compensation, and scales of economy arising from monopoly power. The second goal of the article is to examine the impact of first- versus third-party compensation on the settlement of property damage claims. We analyze the claim files of a large insurer that operates within both a traditional tort (third-party) environment and a first-party recovery environment for property damage. We find that in a first-party recovery regime claims are settled sooner, settlement costs are lower, and not-at-fault drivers are compensated at a higher rate than in the traditional tort environment.     

Deposit Insurance and the Discount Window: Pricing under Asymmetric Information

The risk-sensitive pricing of deposit insurance and the discount window is determined in an environment where banks have private information concerning their financial conditions. The two facilities are managed jointly; an incentive-compatible policy is designed such that banks' choice of terms at which they can obtain insurance and access to discount window credit will reveal their asset quality. The function of the discount window is to be a risk-neutral “lender of last resort” to banks in a market dominated by risk-averse depositors.     

Pure Versus Mutual Health Insurance: Evidence From Swedish Historical Data

Using data from voluntary Swedish health insurance societies 1902‐1910, this article analyzes the coexistence of pure and mutual insurance societies where pure societies are characterized by charging ex ante premiums only while mutuals in addition charge ex post assessments. On average, mutual insurance societies are found to be larger and to offer greater insurance coverage per member. Pure insurance societies have, on average, higher insurance coverage per day, greater mean levels of moral hazard controls, a higher mean number of policy categories, and greater longevity.     

Testing Adverse Selection With Two‐Dimensional Information: Evidence From the Singapore Auto Insurance Market

This article examines adverse selection in insurance markets with two‐dimensional information: policyholders’ riskiness and degree of risk aversion. We build a theoretical model to make equilibrium predictions on competitive insurance screening. We study several variations on the pattern of information asymmetry. The outcomes range from full separation to partial separation, and complete pooling of risk types. Next, we propose a copula approach to jointly examine policyholders’ coverage choice and accident occurrence in the Singapore automobile insurance market. Furthermore, we invoke the theory to identify subgroups of policyholders for whom one may expect the risk–coverage correlation and adverse selection to arise.     

IAS Versus U.S. GAAP: Information Asymmetry–Based Evidence from Germany's New Market

Motivated by the debate about globally uniform accounting standards, this study investigates whether firms using U.S. generally accepted accounting principles (GAAP) vis‐à‐vis international accounting standards (IAS) exhibit differences in several proxies for information asymmetry. It exploits a unique setting in which the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and U.S. GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing requirements, market microstructure, and standards enforcement are held constant. In this setting, differences in the bid‐ask spread and share turnover between IAS and U.S. GAAP firms are statistically insignificant and economically small. Subsequent analyses of analysts' forecast dispersion, initial public offering underpricing, and firms' standard choices corroborate these findings. Thus, at least for New Market firms, the choice between IAS and U.S. GAAP appears to be of little consequence for information asymmetry and market liquidity. These findings do not support widespread claims that U.S. GAAP produce financial statements of higher informational quality than IAS.     

Product Ratings as a Market Reaction to Deregulation: Evidence From the German Insurance Market

This study provides the first investigation of information markets as a reaction to deregulation of product forms in insurance markets. The article studies the case of Germany, where insurance product ratings entered the market after relaxation of product regulation in 1994. The ratings’ potential for enhancing the performance of a deregulated insurance market is analyzed by considering both market structure and governance characteristics of the rating market, since the theoretical literature predicts that both are important determinants of rating outcomes. Data from a unique panel data set containing disability insurance ratings from the three major rating agencies are also examined in light of theoretical predictions. Results suggest that market governance and competition characteristics are favorable for the production of unbiased and informative ratings. Ratings for disability insurance support this interpretation, since the characteristics of the ratings conform to theoretical predictions about ratings in well‐functioning rating markets.     

Trading Better Versus Making More: Evidence from an Emerging Market

Using transaction data from Egypt, we examined the controversy over which investor—domestic or foreign—has superior trading performance in emerging markets. We account for informational and behavioral differences across investors by classifying them by origin and type and comparing their performance in trade execution versus profitability. Domestic institutions execute trades at the best prices with the greatest advantage against foreign institutions. This advantage is reduced when foreign institutions focus on large firms and trades. Profitability analysis revealed, however, that domestic investors accrue significant losses against foreign investors, suggesting that trading better does not necessarily translate into making more money.