Adverse selection and statistical discrimination: An analysis of Canadian automobile insurance

Statistical discrimination occurs when a characteristic, such as sex, is used as an indicator of the risk group of an individual. The theory of adverse selection is used to explain the occurrence of statistical discrimination. A model of the market for collision insurance, which is based on the theory of adverse selection, is estimated on Canadian data. The results suggest that adverse selection occurs in this market. Simulations of the effect of prohibiting sexual discrimination in the 21–24 age group indicate that the premiums for single females would increase substantially and that a significant proportion would no longer purchase collision insurance.