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Testing for Adverse Selection in Insurance Markets

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  • Alma Cohen
  • Peter Siegelman

Abstract

This article reviews and evaluates the empirical literature on adverse selection in insurance markets. We focus on empirical work that seeks to test the basic coverage-risk prediction of adverse selection theory-that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, we argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. We discuss various reasons why a coverage-risk correlation may not be found in some pools of insurance policies. The presence of a coverage-risk correlation can be explained either by moral hazard or adverse selection, and we discuss methods for distinguishing between them. Finally, we review the evidence on learning by policyholders and insurers. Copyright (c) The Journal of Risk and Insurance, 2010.

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  • 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.
  • Handle: RePEc:bla:jrinsu:v:77:y:2010:i:1:p:39-84
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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