Does Drunk-Driving Liability Insurance Induce Asymmetric Information in the Insurance Market?

Preface. Introduction. Part I: Survey Articles. Economic Theory of Risk Exchanges: A Review C. Gollier. The Demand and Supply of Liability Insurance P.M. Danzon, S.E. Harrington. Moral Hazard and Insurance Contracts R.A. Winter. Adverse Selection in Insurance Markets: A Selective Survey G. Dionne, N. Doherty. Financial Pricing of Property and Liability Insurance J.D. Cummins. Econometric Models of Accident Distributions M. Boyer, G. Dionne, C. Vanasse. Part II: Essays. A. Theoretical Models. Optimal Insurance: A Non Expected Utility Analysis E. Karni. Background Risk, Prudence and the Demand for Insurance L. Eeckhoudt, M. Kimball. Optimum Insurance with Deviant Beliefs J.M. Marshall. Increases in Risk and the Demand for Insurance Y. Alarie, G. Dionne, L. Eeckhoudt. Crop Insurance in Incomplete Markets B. Ramaswami, T.L. Roe. How Does Ambiguity Affect Insurance Decisions? H. Kunreuther, R.M. Hogarth. Moral Hazard and Competitive Insurance Markets R.J. Arnott. Probationary Periods and Time-Dependent Deductibles in Insurance Markets with Adverse Selection C. Fluet. Insurance Classifications and Social Welfare S.A. Rea. B. Empirical Models. Social Insurance in Market Contexts: Implications of the Structure of Workers' Compensation for Job Safety and Wages M.J. Moore, W.K. Viscusi. Testing for Asymmetric Information in Canadian Automobile Insurance B. Dahlby. Incentive Effects of no Fault Automobile Insurance: Evidence from Insurance Claim Data J.D. Cummins, M.A. Weiss. Measuring the Effects of the 1978 Quebec Automobile Insurance Act with the DRAG Model M. Gaudry. Liability versus No-Fault Automobile Insurance Regimes: An Analysis of the Experience in Quebec R.A. Devlin. Index.

Market Insurance, Self-Insurance, and Self-Protection

The aim of this paper is to understand which factors affect crop insurance decision in France and in Italy. These neighbor countries are characterized by a changing insurance system from a public fund to private policies which are highly subsidized. Despite the stakes related to crop insurance - CAP reform, size of the market, implication of the governments -, few studies have been drawn on this topic. The literature in finance and in agricultural economics allows to build a two-stage empirical model which computes the elasticities of demand for crop insurance, and to define its key determinants. It appears that France and Italy present similar insurance systems in terms of products and of ability to indemnify. However, the farmers' sensitivity to insurance is most contrasted across the Alps. This leads to a discussion about the creation of an insurance market at the European scale.Keywords: Crop insurance, Insurance demandJEL Classification: G22, Q14IntroductionThe management of risk in agriculture and the role of insurance long have been the centre of attention for researchers and policymakers. A review of the literature on the subject consistently shows the failure of private markets for comprehensive (multiperil) agricultural insurances and their unsustainability in the absence of any public intervention. Even with strong public support, insurance demand is not often as high as could be expected.Reasons for such failures are usually found in either supply or demand conditions. On the supply side, the most explored issues are asymmetric and incomplete information (Chambers 1989; Miranda 1991; Mahul 1999; Just, Calvin and Quiggin 1999; Bourgeon and Chambers, 2003), with the resulting problems of adverse selection, moral hazard and systemic risk. This may pose the most serious obstacle to the emergence of an independent private comprehensive crop insurance industry. Especially due to the systemic character of yield risks, reinsurance becomes very expensive. Without government subsidies or public reinsurance, insurers pass this high cost to the farmers' premiums (Doherty and Dionne 1993; Miranda and Glauber 1997; Mahul 2001).On the demand side, the inability of farmers to assess precisely the benefits derived from agricultural insurances is often cited as one possible reason for limited demand (Garrido and Zilberman 2008). Another explanation for the limited interest in multiperil crop insurance is simply that the organizational structure of farming is such that farmers can use other private instruments - such as product diversification, credit, financial markets, and so on - to manage risk and therefore that the potential demand for crop insurance is lower than commonly believed (Wright and Hewitt 1994). We can also consider that massive government intervention in developed countries may also crowd out private markets.Knowledge of factors affecting farmer purchases of crop insurance is essential for evaluating the soundness and profitability of insurance programs and the pertaining public support (Goodwin and Smith 1995). In spite of its importance, the demand for crop insurance has received little empirical attention in literature, mainly devoted for investigation focused on North American area. Gardner and Kramer (1986); Niewoudt et al. (1985); and Barnett et al. (1990) found that the expected rate of return to insurance was an important factor in determining the demand for insurance. Lower attention has been devoted to the possible impact of financial issue on this field (Enjolras and Sentis 2011).Currently, for the European countries this lack of empirical evidence is exacerbated (Capitanio and Adinolfi, 2009). With this preliminary remarks, carrying out this analysis we wish to point out which factors could affect crop insurance decision in France and Italy, taking into account both agricultural and financial variables (De Castro et al, 2011)The first part of this paper is devoted to a presentation of the French and Italian insurance systems. …

Previous articleNext article No AccessCompetition with Hidden KnowledgeJohn G. RileyJohn G. Riley Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 93, Number 5Oct., 1985 Article DOIhttps://doi.org/10.1086/261344 Views: 9Total views on this site Citations: 38Citations are reported from Crossref Copyright 1985 The University of ChicagoPDF download Crossref reports the following articles citing this article:Ivija Bernatović, Alenka Slavec Gomezel, Matej Černe Mapping the knowledge-hiding field and its future prospects: a bibliometric co-citation, co-word, and coupling analysis, Knowledge Management Research & Practice 20, no.33 (Jun 2021): 394–409.https://doi.org/10.1080/14778238.2021.1945963Stephen Fox, Adrian Kotelba Organizational Neuroscience of Industrial Adaptive Behavior, Behavioral Sciences 12, no.55 (May 2022): 131.https://doi.org/10.3390/bs12050131Andrea Attar, Thomas Mariotti, François Salanié Entry-Proofness and Discriminatory Pricing under Adverse Selection, American Economic Review 111, no.88 (Aug 2021): 2623–2659.https://doi.org/10.1257/aer.20190189Andrea Attar, Thomas Mariotti, François Salanié Concurrence non exclusive et sélection adverse, Revue économique Vol. 69, no.66 (Nov 2018): 1009–1023.https://doi.org/10.3917/reco.696.1009John G. 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Chapter 5 - Insurance and Insurance Markets

Adverse selection and moral hazard are different types of information asymmetry in the insurance market, but their empirical evidence cannot be separated using the traditional positive risk-coverage correlation test. In this paper, we use a new method to disentangle adverse selection and moral hazard, which is to test for the correlation between the past and current claim numbers under experience rating. We conduct the test on the auto insurance data from a Chinese large domestic insurer from 2010-2013. We expect that the serial correlation of claim numbers would be negative under moral hazard but positive under adverse selection because the experience-based rating could incentivize drivers to take more precautions after a claim occurs, which can reduce the number of claims in the next period. However, drivers with high risk should have a consistently high number of claims over time because their risk type does not change dramatically in a short period. Our empirical result shows a negative correlation between the past and current claim numbers, indicating that moral hazard is more critical than adverse selection in this auto insurance market. Besides, the negative coefficient has a larger magnitude for drivers whose no-claim discount rate is higher since these drivers would face a more significant increase in premiums once a claim occurs. We further examine the design of insurance product in this market to investigate why moral hazard is significant. We find that the option of waiving coinsurance liability is underpriced so that over 90 percent of drivers in the sample choose to buy full insurance. Hence, we propose that the regulators should have less stringent regulation on product design and rate.

This paper analyzes optimal and equilibrium insurance contracts under adverse selection and moral hazard, comparing them with those under a single informational asymmetry. The complex interactions of self-selection and moral hazard constraints have important consequences. We develop an analytic approach that allows a characterization of equilibrium and optimal (Pareto Optimal (PO), and Utilitarian optimal (UO)) allocations. Among the results : (i) a PO allocation may involve shirking (not only less care in accident avoidance than is possible, but less care compared to the case of pure moral hazard) either by high risk individuals in the case of single-crossing preference or by one or both types in the case of multi-crossing preference (as may naturally be the case under the double informational asymmetry); and (ii) while an equilibrium, which is unique (even under multi-crossing preferences) if it exists, is more likely to exist as the non-shirking constraint for low-risk type gets more stringent (i.e. when low risk individuals shirk with lower levels of insurance). We also show that a pooling equilibrium, which is not feasible under pure adverse selection, may exist when individuals differ in risk aversion (as well as in accident probability) or when the provision of insurance is non-exclusive (i.e. individuals can purchase insurance from more than one firm). Furthermore, while with pure adverse selection, UO always entails pooling with complete insurance (in the standard model), with adverse selection and moral hazard, all PO allocations may entail separation and the UO may entail incomplete insurance. We show further that, in general, any PO allocation can be implemented by a basic pooling insurance provided by the government and a supplemental separating contracts that can be offered by the market, although, in the presence of moral hazard, a tax needs to be imposed upon the market provision. The analysis suggests that two commonly observed features of many countries' public insurance schemes are consistent with PO: (a) Some individuals (type H) shirk--contrary to widespread views, it is not a sign of a poorly designed system that some individuals shirk; and (b) there exists a hybrid provision of insurance by the government and the market.

Preface.- Introduction.- Part 1: History.- Developments in Risk and Insurance Economics: the Past 40 Years.- Part 2 : Risk and Insurance Theory Without Information Problems.- Higher-Order Risk Attitudes.- Non-Expected Utility and the Robustness of the Classical Insurance Paradigm.- The Economics of Optimal Insurance Design.- The Effects of Changes in Risk on Risk Taking: A Survey.- Risk Measures and Dependence Modeling.- The Theory of Insurance Demand.-Prevention and Precaution.- Part 3 : Asymmetric Information: Theory.- Optimal Insurance Contracts under Moral Hazard.- Adverse Selection in Insurance Contracting.- The Theory of Risk Classification.- The Economics of Liability Insurance.- Economic Analysis of Insurance Fraud.- Part 4: Asymmetric Information: Empirical Analysis.- Asymmetric Information in Insurance Markets: Predictions and Tests.- The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data.- Workers' Compensation: Occupational Injury Insurance's Influence on the Workplace.- Experience Rating in Non-Life Insurance.- Part 5 : Risk Management.- On the Demand for Corporate Insurance - Creating Value.- Managing Catastrophic Risks through Redesigned Insurance: Challenges and Opportunities.- Innovations in Insurance Markets: Hybrid and Securitized Risk-Transfer Solutions.- Risk Sharing and Pricing in the Reinsurance Market.- Part 6 : Insurance Pricing.- Financial Pricing of Insurance.- Insurance Price Volatility and Underwriting Cycles.- Part 7 : Industrial Organization of Insurance Markets.- On the Choice of Organizational Form: Theory and Evidence from the Insurance Industry.- Insurance Distribution.- Corporate Governance in the Insurance Industry: A Synthesis.- Systemic Risk and the Insurance Industry.- Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency and Productivity Methods.- Capital Allocation and its Discontents.- Capital and Risks Interrelationships in the Life and Health Insurance Industries: Theories and Applications.- Insurance Market Regulation: Catastrophe Risk, Competition, and Systemic Risk.- Insurance Markets in Developing Countries: Economic Importance and Retention Capacity.- Part 8: Health and Long-Term Care Insurance, Longevity Risk, Life Insurance, and Social Insurance.- Health Insurance in the United States.- Longevity Risk and Hedging Solutions.- Long-Term Care Insurance.- New Life Insurance Financial Products.- The Division of Labor Between Private and Social Insurance.

The problem of asymmetric information occurs when one party of an economic transaction has insufficient knowledge about the other party to make accurate decisions. The moral hazard, on the other hand, is the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. In insurance market the moral hazard is tendency by which people expend less effort protecting those goods which are insured against theft or damage.

Adverse selection, moral hazard, and crowding out by public insurance have all been proposed as theoretical reasons for why the market for private long-term care insurance has been slow to evolve in the U.S. Using national samples of the elderly and near elderly, this study investigates which is most important. The data contain direct measures of risk aversion, expectations of future nursing home use and living to old age, and the bequest motive. For both groups, we find evidence of adverse selection, and, for the elderly, crowding out of private long-term care insurance by Medicaid. However, we do not find that demand for such insurance is motivated either by bequest or exchange motives.

This paper draws a remarkably simple bridge between auction theory and incentive theory. It considers the auctioning of an indivisible project among several fi rms. The firms have private information about their future cost at th e bidding stage, and the selected firm ex post invests in cost reduct ion. The authors show that (1) the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid; (2) the winner faces a (linear) incenti ve contract; (3) the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost; and (4) the share of cost overruns borne by the winn er decreases with the winner's announced expected cost. Copyright 1987 by University of Chicago Press.

Background:Asymmetric information is one of the most important issues in insurance market which occurred due to inherent characteristics of one of the agents involved in insurance contracts; hence its management requires designing appropriate policies. This phenomenon can lead to the failure of insurance market via its two consequences, namely, adverse selection and moral hazard.Objective:This study was aimed to evaluate the status of asymmetric information in Iran’s health insurance market with respect to the demand for outpatient services.Materials/sPatients and Methods:This research is a cross sectional study conducted on households living in Iran. The data of the research was extracted from the information on household’s budget survey collected by the Statistical Center of Iran in 2012. In this study, the Generalized Method of Moment model was used and the status of adverse selection and moral hazard was evaluated through calculating the latent health status of individuals in each insurance category. To analyze the data, Excel, Eviews and stata11 software were used.Results:The estimation of parameters of the utility function of the demand for outpatient services (visit, medicine, and Para-clinical services) showed that households were more risk averse in the use of outpatient care than other goods and services. After estimating the health status of households based on their health insurance categories, the results showed that rural-insured people had the best health status and people with supplementary insurance had the worst health status. In addition, the comparison of the conditional distribution of latent health status approved the phenomenon of adverse selection in all insurance groups, with the exception of rural insurance. Moreover, calculation of the elasticity of medical expenses to reimbursement rate confirmed the existence of moral hazard phenomenon.Conclusions:Due to the existence of the phenomena of adverse selection and moral hazard in most of health insurances categories, policymakers need to adjust contracts so that to reduce these phenomena. Given the importance of financing, the presence of such problems can lead to less coverage of health insurance provided by insurers, loss of contracts with health care institutions and service providers, and lower quality of health services.

This chapter broadly defines the law and economics of insurance. An overview of both economically oriented legal scholarship and traditional economics scholarship is provided. This vantage point reveals the centrality of certain core economic concepts to insurance law and regulation. Moreover, it suggests ways to improve the law by embracing sophisticated understandings of the economics of information asymmetries. For instance, insurance law and regulation assume that adverse selection and moral hazard are important problems in all insurance markets; however, the phenomena come in varying degrees. Thus, their magnitude is an empirical question. An equally significant lacuna in much insurance law is the absence of an equilibrium approach that anticipates insurance market reactions to legal interventions. Similarly, the specific insights of behavioral economics to understand anomalies in insurance demand and how the law might respond are emerging. The law and economics of insurance is still ripe for development.

This paper reviews four recent books on insurance economics. One of them is a comprehensive textbook, one a discussion of the financial aspects of insurance reserving, and the other two (with a common author) deal with moral hazard and adverse selection. My review deals with the treatment of possible market failures in insurance in each of the cases, and concentrates on information asymmetries and imperfections as a potential source. I argue that adverse selection in insurance usually arises because of some external influence (either regulation or custom) which forces insurers to ignore information on risk that they could easily obtain. In contrast, moral hazard occurs in the more intractable situation where the insured has private knowledge after insurance purchase about determinants of claims. Each of the books provides rigorous, careful, and (in one case) humorous treatment of imperfections, but a reader looking for a comprehensive treatment of potential market failure will have to combine the separate topics across these books.

This article reviews and evaluates the empirical literature on adverse selection in insurance markets. We focus on empirical work that seeks to test the basic coverage–risk prediction of adverse selection theory—that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, we argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. We discuss various reasons why a coverage–risk correlation may not be found in some pools of insurance policies. The presence of a coverage–risk correlation can be explained either by moral hazard or adverse selection, and we discuss methods for distinguishing between them. Finally, we review the evidence on learning by policyholders and insurers.