Loss coverage in insurance markets: why adverse selection is not always a bad thing

Hao, MingJie and Tapadar, Pradip and Thomas, R. Guy (2015) Loss coverage in insurance markets: why adverse selection is not always a bad thing. In: International Actuarial Association Colloquium, 7-10 June 2015, Oslo, Norway. (Full text available)

Abstract

This paper investigates equilibrium in an insurance market where risk classification is restricted. Insurance demand is characterised by an iso-elastic function with a single elasticity parameter. We characterise the equilibrium by three quantities: equilibrium premium; level of adverse selection; and “loss coverage”, defined as the expected population losses compensated by insurance. We find that equilibrium premium and adverse selection increase monotonically with demand elasticity, but loss coverage first increases and then decreases. We argue that loss coverage represents the efficacy of insurance for the whole population; and therefore, if demand elasticity is sufficiently low, adverse selection is not always a bad thing.

Item Type:	Conference or workshop item (Paper)
Subjects:	Q Science > QA Mathematics (inc Computing science)
Divisions:	Faculties > Sciences > School of Mathematics Statistics and Actuarial Science Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User:	Pradip Tapadar
Date Deposited:	20 Oct 2017 20:52 UTC
Last Modified:	23 Oct 2017 11:28 UTC
Resource URI:	https://kar.kent.ac.uk/id/eprint/64112 (The current URI for this page, for reference purposes)
Tapadar, Pradip:	https://orcid.org/0000-0003-0435-0860