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Economic Effects of Risk Classification Bans

Author

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  • Georges Dionne

    (HEC Montreal, 3000, Cote-Ste-Catherine, room 4454, Montreal (Qc), H3T 2A7, Canada.)

  • Casey Rothschild

    (Wellesley College, Pendleton Hall East, Room 414, 106 College St., Wellesley, MA, 02481, USA.)

Abstract

Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, to compute the corresponding premiums, and thereby to reduce asymmetric information. Permitting risk classification may reduce informational asymmetry-induced adverse selection and improve insurance market efficiency. It may also have undesirable equity consequences and undermine the implicit insurance against reclassification risk, which legislated restrictions on risk classification could provide. We use a canonical insurance market screening model to survey and to extend the risk classification literature. We provide a unified framework for analysing the economic consequences of legalised vs banned risk classification, both in static-information environments and in environments in which additional information can be learned, by either side of the market, through potentially costly tests.

Suggested Citation

  • Georges Dionne & Casey Rothschild, 2014. "Economic Effects of Risk Classification Bans," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 184-221, September.
  • Handle: RePEc:pal:genrir:v:39:y:2014:i:2:p:184-221
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    5. David A. Cather, 2020. "Reconsidering insurance discrimination and adverse selection in an era of data analytics," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(3), pages 426-456, July.
    6. Hao, MingJie & Macdonald, Angus S. & Tapadar, Pradip & Thomas, R. Guy, 2018. "Insurance loss coverage and demand elasticities," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 15-25.
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    8. Bardey, David & De Donder, Philippe & Mantilla, César, 2019. "How is the trade-off between adverse selection and discrimination risk affected by genetic testing? Theory and experiment," Journal of Health Economics, Elsevier, vol. 68(C).
    9. Peter, Richard & Richter, Andreas & Thistle, Paul, 2017. "Endogenous information, adverse selection, and prevention: Implications for genetic testing policy," Journal of Health Economics, Elsevier, vol. 55(C), pages 95-107.
    10. Gemmo, Irina & Browne, Mark J. & Gründl, Helmut, 2017. "Transparency aversion and insurance market equilibria," ICIR Working Paper Series 25/17, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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