Background Risk and the Performance of Insurance Markets under Adverse Selection

Background risk can influence the performance of insurance markets that must deal with adverse selection when applicants are risk vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk. We show that background risk always results in a lower deductible for the incentive constrained contract, and that a broader range of markets attains the stable sequential equilibrium cross-subsidized pair of separating contracts. We conclude that background risk always improves the performance of markets for coverage against (insurable) foreground risks that must deal with adverse selection. We also find, however, that these improvements are never sufficient to offset the cost to insureds of bearing the background risk.     

Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening

We discuss the existence of a pooling equilibrium in a two-period model of an insurance market with asymmetric information. We solve the model numerically. We pay particular attention to the reasons for non-existence in cases where no pooling equilibrium exists. In addition to the phenomenon of cream skimming emphasized in earlier literature, we here point to the importance of the opposite: dregs skimming, whereby high-risk consumers are profitably detracted from the candidate pooling contract.     

Equilibrium in Competitive Insurance Markets Under Adverse Selection and Yaari's Dual Theory of Risk

Under Yaari's dual theory of risk, we determine the equilibrium separating contracts for high and low risks in a competitive insurance market, in which risks are defined only by their expected losses, that is, a high risk is a risk that has a greater expected loss than a low risk. Also, we determine the pooling equilibrium contract when insurers are assumed non-myopic. Expected utility theory generally predicts that optimal insurance indemnity payments are nonlinear functions of the underlying loss due to the nonlinearity of agents' utility functions. Under Yaari's dual theory, we show that under mild technical conditions the indemnity payment is a piecewise linear function of the loss, a common property of insurance coverages.     

Competitive Insurance Markets and Adverse Selection in the Lab

We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterised version of the lemons’ model of Akerlof in the insurance context predicts total crowding-out of low risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz consists of adding a partial insurance contract so as to obtain self-selection of risks. We test the theoretical predictions of these two models in two experiments. A clean test is obtained by matching the parameters of these experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding-out of low risks in the first experiment. Crowding-out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. The latter can be sustained because insureds who objectively differ in their risk level do not perceive themselves as being so much different.     

Adverse Selection and Competing Deposit Insurance Systems in Pre-Depression Texas

In 1910, Texas instituted a unique deposit insurance program for its state chartered banks by providing a choice between two separate plans: the depositors guaranty fund, similar to insurance schemes in several other states, and the depositors bond security system, which required the procurement of a privately issued guarantee of indemnity. While, under most deposit insurance schemes, the incentive to monitor the financial condition of individual banks simply devolves from depositors to regulators, the bond security system established in Texas distinguished itself by attempting to reintroduce market discipline through the indemnity requirement. Using a probit model with heteroscedasticity, we find evidence that the choice of insurance coverage led to risk-sorting among the banks, with relatively conservative and financially secure institutions opting for the comparatively rigorous bond security system. In addition, the bank failure record indicates the risk differentials between banks in the two plans persisted over time and even possibly grew, suggesting the bond security system at least partially avoided the moral hazard incentives associated with the fixed-rate depositors guaranty plan. These findings support the general view that market discipline is effective in banking.     

中国健康险市场逆向选择和正向选择并存现象的研究

本文以中国的健康险市场为例,考察不对称信息的影响。通过考察投保人投保金额以及附加险选择和索赔情况的相关关系,论文发现事后出现索赔的投保人,事前往往会选择购买附加险,但是投保金额却相对较低。结合理论模型分析,论文认为投保人在财富、风险偏好等方面的异质性以及信息不对称的存在是导致市场同时出现逆向选择和正向选择的主要原因。     

逆向选择条件下带甄别期的最优保险设计

为了改善信息不对称对保险市场交易效率的影响,分投保人为两种及两种以上风险类型建立了带甄别期的保险契约模型,指出可以利用投保人在甄别期的风险发生情况来推断投保人的风险类型.带甄别期的保险契约是指:自保险合同生效之日起的一段时间内(甄别期),如果投保人发生风险,保险公司将给予一定的赔偿,甄别期过后,如果投保人再次发生风险,保险公司将不再给予任何赔偿;如果投保人在甄别期未发生风险,而在甄别期之后的剩余保险期发生风险,保险公司仍然给予与上述情况相同的赔偿.证明指出效用最优时带甄别期的保险契约不比R-S传统部分保险契约差,并给出了前者是后者严格帕累托改进的充分条件.此外,对于两种以上风险类型情形,证明了满足对次低风险投保人的激励相容约束是满足对其余高风险投保人激励相容约束的一个充分不必要条件,并给出了相应的充分条件,进一步指出该充分条件的集合恰是带甄别期的保险契约能够产生分离均衡的一个充分条件.最后,以一个算例说明确实存在效用最优时带甄别期的保险契约是R-S传统部分保险契约的严格帕累托改进情形.     

An Insurance Market Simulation With Both Adverse and Advantageous Selection

The theory of adverse selection predicts that high‐risk individuals are more likely to buy insurance than low‐risk individuals if asymmetric information regarding individuals’ risk type is present in the market. The theory of advantageous selection predicts the opposite—a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom‐based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands‐on experience, and supplements current textbooks by bringing their content up to date with current research.     

Full Insurance, Bayesian Updated Premiums, and Adverse Selection

In the classic Rothschild-Stiglitz model of adverse selection in a competitive environment, we analyse a no-claims bonus type contract (bonus-malus). We show that, under full insurance coverage, if the insurance company applies Bayes's rule to learn about client probability types over time and uses this information in premium calculations for contract renewals, then there exist conditions under which all client types strictly prefer the Bayesian updating contract to the classic Rothschild-Stiglitz separating equilibrium.     

New Developments in the Theory of Adverse Selection in Competitive Insurance

We provide an overview of the paths taken to understand existence and efficiency of equilibrium in competitive insurance markets with adverse selection since the seminal work by Rothschild and Stiglitz (1976). A stream of recent work reconsiders the strategic foundations of competitive equilibrium by carefully modelling the market game.     

The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed

This article models a situation in which a monopolistic insurer evaluates risk better than its customers. The resulting equilibrium allocations are compared to the consequences of the standard adverse selection hypothesis. On the positive side, they exhibit the property that low-risk people are better covered than higher-risk people. On the normative side, the article shows that there are two reasons for avoiding excessive risk classification: one is the classical destruction of insurance possibilities, and the other comes from the distrustful atmosphere generated by new asymmetric information.     

An Examination of Adverse Selection in the Public Provision of Insurance

Using a unique data set from Florida's residual property insurer, we test for adverse selection in the public provision of homeowners’ insurance in Florida. We find a significant relationship between the losses and deductible choices of insureds in Florida's residual homeowners’ insurance market. This relationship provides strong evidence of the existence of an adverse selection problem in Florida's residual property insurance market. While this relationship is important to Florida regulators (and taxpayers) specifically, a finding of an adverse selection problem in residual markets in general has implications more broadly for government providers of insurance as an adverse selection problem in these settings will impact the public policy debates and decisions involving these markets.     

“逆向选择”风险与非财务因素分析——兼议信贷市场准入资格调查

信贷市场中的买卖双方是一种博弈关系,信贷营销中存在“逆向选择”风险。作为银行客户经理如何判断,分析“逆向选择”风险,其中重要的信息采集来自于非财务因素分析。非财务因素分析要准确采集来自目标企业的相关信息,并着重从行业风险、经营风险、管理风险等方面来进行,并要紧抓重点,依靠对会计政策的熟练掌握来感知企业。     

社会保险市场上的逆向选择与公共政策干预:国际研究动态述评

随着社会经济的进步与发展,提供社会保险日益成为现代政府的重要任务,而信息不对称带来的逆向选择这一市场失灵问题是政府提供社会保险的主要经济依据之一。由此,近年来国际学术界涌现出一大批关于社会保险市场上逆向选择与公共政策干预问题的研究文献,在将理论与数据相结合以分析公共政策的福利影响方面出现了很多研究进展。本文就尝试对这一领域的研究进行总结与分析,为国内学术研究的开展与公共经济政策的设计提供有益借鉴。     

Complete Versus Incomplete Insurance Contracts under Adverse Selection with Multiple Risks

This article extends the standard adverse-selection model for competitive insurance markets, which assumes a single source of risk, to the case where individuals are subject to multiple risks. We compare the following market situations—the case where insurers can offer comprehensive policies against all sources or risks (complete contracts) and the case where different risks are covered by separate policies (incomplete contracts). In the latter case, we consider whether the insurer of a particular risk has perfect information regarding an individual's coverage against other sources of risks. The analysis emphasizes the informational role of bundling in multidimensional screening. When the market situation allows bundling, it is shown that in equilibrium the low-risk type with respect to a particular source of risk does not necessarily obtain partial coverage against that particular risk.     

Adverse Selection With Frequency and Severity Risk: Alternative Risk‐Sharing Provisions

The analysis considers an insurance market with adverse selection where individuals' loss distributions may differ with respect to both the frequency and severity of loss. We show that the combination of deductibles and coinsurance can be used to sort rationed policyholders. Because of their screening properties, coinsurance and deductibles may both be equilibrium forms of risk sharing for a particular insurer facing asymmetric information, with different rationed consumers choosing different risk‐sharing provisions.     

Adverse Selection in Reinsurance Markets

This paper looks for evidence of adverse selection in the relationship between primary insurers and reinsurers. We test the implications of a model in which informational asymmetry—and therefore, its negative consequences—decline over time. Our tests involve a data panel consisting of U.S. property-liability insurance firms that reported to the National Association of Insurance Commissioners during the period 1993–2012. We find that the amount of reinsurance, insurer profitability, and insurer credit quality all increase with the tenure of the insurer–reinsurer relationship.