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Risk Classification in Insurance Contracting

Author

Listed:
  • 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.

Suggested Citation

  • Georges Dionne & Casey G. Rothschild, 2011. "Risk Classification in Insurance Contracting," Cahiers de recherche 1137, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1137
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2011/CIRPEE11-37.pdf
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    Cited by:

    1. 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.
    2. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.

    More about this item

    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;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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