Are the dimensions of private information more multiple than expected? Information asymmetries in the market of supplementary private health insurance in England

Martin Karlsson, Florian Klohn and Ben Rickayzen

No 213, Darmstadt Discussion Papers in Economics from Darmstadt University of Technology, Department of Law and Economics

Abstract: Our study reexamines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk - although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; ie people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied.

Keywords: Information Asymmetries; Insurance markets; Applied Econometrics (search for similar items in EconPapers)
JEL-codes: C18 I11 I13 (search for similar items in EconPapers)
Date: 2012
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Related works:
Working Paper: Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England (2012)
Working Paper: Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England (2012)
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