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Risk Classification in Insurance Contracting

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Author Info

  • Georges Dionne
  • Casey G. Rothschild

Abstract

Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, compute the corresponding premiums, and thereby reduce asymmetric information. An efficient risk classification system generates premiums that fully reflect the expected cost associated with each class of risk characteristics. This is known as financial equity. In the health sector, risk classification is also subject to concerns about social equity and potential discrimination. We present different theoretical frameworks that illustrate the potential trade-off between efficient insurance provision and social equity. We also review empirical studies on risk classification and residual asymmetric information.

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2011/CIRPEE11-37.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1137.

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Date of creation: 2011
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Handle: RePEc:lvl:lacicr:1137

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Related research

Keywords: Adverse selection; classification risk; diagnostic test; empirical test of asymmetric information; financial equity; genetic test; health insurance; insurance rating; insurance pricing; moral hazard; risk classification; risk characteristic; risk pooling; risk separation; social equity;

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Cited by:
  1. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
  2. Georges Dionnne & Pierre-Carl Michaud & Jean Pinquet, 2012. "A Review of Recent Theoretical and Empirical Analyses of Asymmetric Information in Road Safety and Automobile Insurance," Cahiers de recherche 1204, CIRPEE.

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