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

Noureddine Benlagha () and Imen Karaa

Cogent Economics & Finance, 2017, vol. 5, issue 1, 1330303

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.

Date: 2017
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DOI: 10.1080/23322039.2017.1330303

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