Moral Hazard and Adverse Selection in Insurance Markets: Four Recent Books.

Abstract

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.