Risk classification in insurance contracting

Georges Dionne () and Casey Rothschild

No 11-5, 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. Risk classification can be used to mitigate adverse selection and improve insurance market efficiency, but it may have undesirable equity or efficiency consequences. We employ a canonical screening model of insurance contracting to study these trade‐offs in a range of informational environments, and to understand when efficiency or equity concerns are likely to be particularly important. 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; 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)
Pages: 51 pages
Date: 2012-04-24
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Related works:
Working Paper: Risk Classification in Insurance Contracting (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2011_005

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