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Evidence of adverse selection in automobile insurance market: A seemingly unrelated probit modelling

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  • Noureddine Benlagha
  • Imen Karaa

Abstract

The present paper investigates the adverse selection problem by examining the relationship between accident occurrences and deductible choice utilizing a seemingly unrelated probit model that allows for best controls for unobserved heterogeneity and endogeneity. While this microeconometric analysis does not consider a multivariate model and considers only two types of contracts, namely, those with high and low deductibles, it does suggest important implications from applying a recursive bivariate probit. We employ new cross-sectional data on a Tunisian insurance portfolio containing 31,125 policyholders. The results support some evidence for residual adverse selection in the studied insurance portfolio. Moreover, the results suggest the presence of a wealth effect in the decision of the contract choice.

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  • Noureddine Benlagha & Imen Karaa, 2017. "Evidence of adverse selection in automobile insurance market: A seemingly unrelated probit modelling," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1330303-133, January.
    • Handle: RePEc:taf:oaefxx:v:5:y:2017:i:1:p:1330303
    DOI: 10.1080/23322039.2017.1330303
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    1. Eymen Errais, 2022. "Pricing insurance premia: a top down approach," Annals of Operations Research, Springer, vol. 313(2), pages 899-914, June.

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