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Risk Classification in Insurance Contracting

Georges Dionne and Casey Rothschild ()

Cahiers de recherche from CIRPEE

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.

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 (search for similar items in EconPapers)
JEL-codes: D80 D82 D86 G22 I11 I18 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cta, nep-hea and nep-ias
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