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

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  • Kuniyoshi Saito

Abstract

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. Copyright The Journal of Risk and Insurance, 2006.

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Bibliographic Info

Article provided by The American Risk and Insurance Association in its journal Journal of Risk & Insurance.

Volume (Year): 73 (2006)
Issue (Month): 2 ()
Pages: 335-356

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Handle: RePEc:bla:jrinsu:v:73:y:2006:i:2:p:335-356

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Cited by:
  1. Jason Strauss & Aidan Hollis, 2007. "Insurance Markets When Firms Are Asymmetrically Informed: A Note," Working Papers 2007-18, Department of Economics, University of Calgary, revised 30 Nov 2007.
  2. J Fran´┐Żois Outreville, 2010. "The Geneva Risk and Insurance Review 2009: In Quest of Behavioural Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 35(3), pages 484-497, July.
  3. Philippe Donder & Jean Hindriks, 2009. "Adverse selection, moral hazard and propitious selection," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 73-86, February.
  4. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
  5. Spindler, Martin & Winter, Joachim & Hagmayer, Steffen, 2012. "Asymmetric Information in the Market for Automobile Insurance: Evidence from Germany," MEA discussion paper series 12259, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  6. Dionne, Georges & Michaud, Pierre-Carl & Pinquet, Jean, 2013. "A review of recent theoretical and empirical analyses of asymmetric information in road safety and automobile insurance," Research in Transportation Economics, Elsevier, vol. 43(1), pages 85-97.
  7. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
  8. Yarmukhamedov, Sherzod, 2013. "Empirical analysis of moral hazard: a study of a vehicle insurance tax reform," Working papers in Transport Economics 2013:14, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  9. Janko Gorter & Paul Schilp, 2012. "Risk preferences over small stakes: Evidence from deductible choice," DNB Working Papers 338, Netherlands Central Bank, Research Department.
  10. Marcelo Resende & Rodrigo Zeidan, 2010. "Adverse selection in the health insurance market: some empirical evidence," The European Journal of Health Economics, Springer, vol. 11(4), pages 413-418, August.
  11. Shi, Peng & Valdez, Emiliano A., 2011. "A copula approach to test asymmetric information with applications to predictive modeling," Insurance: Mathematics and Economics, Elsevier, vol. 49(2), pages 226-239, September.
  12. Wu, T.C. Michael & Yang, C.C., 2012. "The welfare effect of income tax deductions for losses as insurance: Insured- versus insurer-sided adverse selection," Economic Modelling, Elsevier, vol. 29(6), pages 2641-2645.
  13. Buchmueller, Thomas C. & Fiebig, Denzil G. & Jones, Glenn & Savage, Elizabeth, 2013. "Preference heterogeneity and selection in private health insurance: The case of Australia," Journal of Health Economics, Elsevier, vol. 32(5), pages 757-767.

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