Risk classification and health insurance

Georges Dionne () and Casey Rothschild

No 12-9, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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. With perfect risk classification, premiums fully reflect the expected cost associated with each class of risk characteristics and yield efficient outcomes. In the health sector, risk classification is also subject to concerns about social equity and potential discrimination. We present an analytical framework that illustrates the potential trade‐off between efficient insurance provision and social equity. We also review empirical studies on risk classification and residual asymmetric information that inform this trade‐off.

Keywords: Adverse selection; classification risk; distributional equity; empirical test of asymmetric information; ex‐ante efficiency; financial equity; genetic test; group equity; horizontal equity; insurance rating; interim efficiency; moral hazard; risk characteristic; risk classification; risk pooling; risk separation; social equity (search for similar items in EconPapers)
JEL-codes: D82 G22 I13 I14 I18 I38 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2012-08-20
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Working Paper: Risk Classification and Health Insurance (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2012_009

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