IDEAS home Printed from https://ideas.repec.org/a/eee/insuma/v83y2018icp110-121.html
   My bibliography  Save this article

The role of heterogeneous parameters for the detection of selection in insurance contracts

Author

Listed:
  • Karlsson, Martin
  • Klohn, Florian
  • Rickayzen, Ben

Abstract

This study re-examines standard econometric approaches for detecting adverse and advantageous selection in insurance contracts based on variables that are not used for calculating the insurance premium. We formally demonstrate that existing strategies for detecting selection based on such ‘unused characteristics’ can lead to incorrect conclusions if the estimated coefficients of interest are driven by different parts of the population. We show that this issue can empirically be accounted for by allowing for heterogeneous parameters. We compare existing approaches by using simulated data with different selection regimes and test for parameter heterogeneity within the data. We further provide empirical evidence about selection into the market for private health insurance in England. Both our simulations, and the findings using real data, suggest that parameter heterogeneity is a relevant issue that can confound the interpretation of standard ‘unused characteristics’ approaches. Our findings are important for analysing the efficiency of insurance markets. They are of interest to both the insurance industry and policymakers, and should be accounted for when selection based on specific characteristics needs to be detected or the effects of structural changes of insurance policies/markets are to be predicted.

Suggested Citation

  • Karlsson, Martin & Klohn, Florian & Rickayzen, Ben, 2018. "The role of heterogeneous parameters for the detection of selection in insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 83(C), pages 110-121.
  • Handle: RePEc:eee:insuma:v:83:y:2018:i:c:p:110-121
    DOI: 10.1016/j.insmatheco.2018.08.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167668717300471
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chiappori, Pierre-Andre & Salanie, Bernard, 1997. "Empirical contract theory: The case of insurance data," European Economic Review, Elsevier, vol. 41(3-5), pages 943-950, April.
    2. repec:oup:jeurec:v:15:y:2017:i:5:p:1101-1157. is not listed on IDEAS
    3. Felfe, Christina & Lechner, Michael & Steinmayr, Andreas, 2011. "Sport and Child Development," Economics Working Paper Series 1135, University of St. Gallen, School of Economics and Political Science.
    4. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    5. Iris Kesternich & Heiner Schumacher, 2014. "On the Use of Information in Oligopolistic Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(1), pages 159-175, March.
    6. repec:kap:reveho:v:15:y:2017:i:4:d:10.1007_s11150-017-9378-9 is not listed on IDEAS
    7. Bolhaar, Jonneke & Lindeboom, Maarten & van der Klaauw, Bas, 2012. "A dynamic analysis of the demand for health insurance and health care," European Economic Review, Elsevier, vol. 56(4), pages 669-690.
    8. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, January.
    9. Mark J Browne & Tian Zhou-Richter, 2014. "Lemons or Cherries? Asymmetric Information in the German Private Long-term Care Insurance Market," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 603-624, October.
    10. 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.
    11. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," American Economic Review, American Economic Association, vol. 98(2), pages 157-162, May.
    12. Inés Berniell & Jan Bietenbeck, "undated". "The Effect of Working Hours on Health," CINCH Working Paper Series 1703, Universitaet Duisburg-Essen, Competent in Competition and Health.
    13. David Cesarini & Erik Lindqvist & Robert Östling & Björn Wallace, 2016. "Wealth, Health, and Child Development: Evidence from Administrative Data on Swedish Lottery Players," The Quarterly Journal of Economics, Oxford University Press, vol. 131(2), pages 687-738.
    14. Denise Doiron & Glenn Jones & Elizabeth Savage, 2008. "Healthy, wealthy and insured? The role of self-assessed health in the demand for private health insurance," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 317-334.
    15. Joelle Abramowitz, 2016. "The connection between working hours and body mass index in the U.S.: a time use analysis," Review of Economics of the Household, Springer, vol. 14(1), pages 131-154, March.
    16. Joelle Abramowitz, 2016. "The connection between working hours and body mass index in the U.S.: a time use analysis," Review of Economics of the Household, Springer, vol. 14(1), pages 131-154, March.
    17. repec:wly:hlthec:v:26:y:2017:i:11:p:1474-1478 is not listed on IDEAS
    18. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 299-328.
    19. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 877-921.
    20. Eibich, Peter, 2015. "Understanding the Effect of Retirement on Health: Mechanisms and Heterogeneity," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 1-12.
    21. Leemore Dafny & Jonathan Gruber & Christopher Ody, 2015. "More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces," American Journal of Health Economics, MIT Press, vol. 1(1), pages 53-81, Winter.
    22. 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.
    23. Blackwell, Debra L. & Hayward, Mark D. & Crimmins, Eileen M., 2001. "Does childhood health affect chronic morbidity in later life?," Social Science & Medicine, Elsevier, vol. 52(8), pages 1269-1284, April.
    24. Christian Breuer, 2015. "Unemployment and Suicide Mortality: Evidence from Regional Panel Data in Europe," Health Economics, John Wiley & Sons, Ltd., vol. 24(8), pages 936-950, August.
    25. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-262, Summer.
    26. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    27. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    28. Gavin Wallis, 2004. "The Determinants Of Demand For Private Medical Insurance: Evidence From The British Household Panel Survey," Royal Economic Society Annual Conference 2004 84, Royal Economic Society.
    29. Amy Finkelstein & James Poterba, 2014. "Testing for Asymmetric Information Using “Unused Observables” in Insurance Markets: Evidence from the U.K. Annuity Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(4), pages 709-734, December.
    30. Propper, Carol & Rees, Hedley & Green, Katherine, 2001. "The Demand for Private Medical Insurance in the UK: A Cohort Analysis," Economic Journal, Royal Economic Society, vol. 111(471), pages 180-200, May.
    31. Grignon, Michel, 2009. "An empirical investigation of heterogeneity in time preferences and smoking behaviors," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(5), pages 739-751, October.
    32. Brown, Jeffrey R. & Finkelstein, Amy, 2007. "Why is the market for long-term care insurance so small?," Journal of Public Economics, Elsevier, vol. 91(10), pages 1967-1991, November.
    33. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-255, March-Apr.
    34. Kristian Bolin & Daniel Hedblom & Anna Lindgren & Bjorn Lindgren, 2010. "Asymmetric Information and the Demand for Voluntary Health Insurance in Europe," NBER Working Papers 15689, National Bureau of Economic Research, Inc.
    35. Denise Doiron & Denzil G. Fiebig & Meliyanni Johar & Agne Suziedelyte, 2015. "Does self-assessed health measure health?," Applied Economics, Taylor & Francis Journals, vol. 47(2), pages 180-194, January.
    36. Rosa Urbanos-Garrido & Beatriz Lopez-Valcarcel, 2015. "The influence of the economic crisis on the association between unemployment and health: an empirical analysis for Spain," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(2), pages 175-184, March.
    37. Meliyanni Johar & Glenn Jones & Michael P. Keane & Elizabeth Savage & Olena Stavrunova, 2013. "The Demand for Private Health Insurance: Do Waiting Lists Matter?” – Revisited," Economics Papers 2013-W09, Economics Group, Nuffield College, University of Oxford.
    38. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
    39. Au, Nicole & Johnston, David W., 2014. "Self-assessed health: What does it mean and what does it hide?," Social Science & Medicine, Elsevier, vol. 121(C), pages 21-28.
    40. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    41. Jeffrey R. Brown & Gopi Shah Goda & Kathleen McGarry, 2016. "Heterogeneity In State-Dependent Utility: Evidence From Strategic Surveys," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 847-861, April.
    42. Pau Olivella & Marcos Vera‐Hernández, 2013. "Testing for Asymmetric Information in Private Health Insurance-super-," Economic Journal, Royal Economic Society, vol. 123(567), pages 96-130, March.
    43. Kiil, Astrid, 2012. "What characterises the privately insured in universal health care systems? A review of the empirical evidence," Health Policy, Elsevier, vol. 106(1), pages 60-75.
    44. Ruhm, Christopher J., 2015. "Recessions, healthy no more?," Journal of Health Economics, Elsevier, vol. 42(C), pages 17-28.
    45. Gao, Feng & Powers, Michael R. & Wang, Jun, 2009. "Adverse selection or advantageous selection? Risk and underwriting in China's health-insurance market," Insurance: Mathematics and Economics, Elsevier, vol. 44(3), pages 505-510, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Insurance markets; Selection; Asymmetric information; Parameter heterogeneity; Applied econometrics;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:83:y:2018:i:c:p:110-121. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505554 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.