Advantageous Selection versus Adverse Selection in Life Insurance Market
The conventional theory of adverse selection ignores the effect of precautionary effortson the probability of death and also doesn’t consider the correlation between the attitude towards risk and risk exposure. The implication of such ignorance will be the insurers end up with high-risk individuals and the market faces the insufficient provision of the policies. However, this theory is not supported by most of the empirical works.The alternative advantageous selection theory assumes a negative correlation between risk aversion and risk exposure and considers the effect of precautionary activity on the death rate. Under these assumptions, insurers end up with relatively low-risk individuals, the market offers sufficient of policies and, the selection effect will be propitious to insurers as more risk-averse low-risk individuals are not only willing to pay more for precautionary efforts but also are more inclined to insure. We show that under certain circumstances when the individuals are sufficiently risk averse, the probability of death is smaller than its critical value, and the processing cost is sufficiently large the selection effect will be advantageous to the market. We also show that when individuals are not sufficiently risk averse and consequently their probability of death is not sufficiently small, the necessary condition for having advantageous selection regime is the processing cost to be smaller than its critical value.
Adverse Selection Advantageous Selection Life Insurance precautionary effort.
Ghadir Mahdavi
Post Doctoral Research Associate, Graduate School of Economics, Kyoto University.
国际会议
西安
英文
2006-07-17（万方平台首次上网日期，不代表论文的发表时间）