Evidence of adverse selection in automobile insurance markets

Georges Dionne (), Christian Gouriéroux and Charles Vanasse
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Christian Gouriéroux: CREST Center for research in economics and statistics
Charles Vanasse: Université de Montréal

No 98-9, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: In this paper, we propose an empirical analysis of the presence of adverse selection in an insurance market. We first present a theoretical model of a market with adverse selection and we introduce different issues related to transaction costs, accident costs, risk aversion and moral hazard. We then discuss an econometric modeling based on latent variables and we derive its relationship with specification tests that may be useful to isolate the presence of adverse selection in the portfolio of an insurer. We discuss in detail the relationship between our modeling and that of Puelz and Snow (1994). Finally, we present some empirical results derived from a different data set. We show that there is no residual adverse selection in the studied portfolio since appropriate risk classification is made by the insurer. Consequently, the insurer does not need a self-selection mechanism such as the deductible choice to reduce adverse selection.

Keywords: Adverse selection; empirical test; risk classification; transaction costs (search for similar items in EconPapers)
JEL-codes: D80 (search for similar items in EconPapers)
Pages: 42 pages
Date: 1998-04-01
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Related works:
Working Paper: Evidence of Adverse Selection in Automobile Insurance Markets (1998)
Working Paper: Evidence of adverse selection in automobile insurance markets (1998)
Working Paper: Evidence of Adverse Selection in Automobile Insurance Markets (1998)
Working Paper: Evidence of Adverse Selection in Automobile Insurance Markets (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:1998_009

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