Are the dimensions of private information more multiple than expected? Information asymmetries in the market of supplementary private health insurance in England

Karlsson, M., Klohn, F. & Rickayzen, B. D. (2012). Are the dimensions of private information more multiple than expected? Information asymmetries in the market of supplementary private health insurance in England (Report No. Actuarial Research Paper No. 197). London, UK: Faculty of Actuarial Science & Insurance, City University London.

[img]
Preview
PDF
Download (399kB) | Preview

Abstract

Our study reexamines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population.

We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk { although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries.

We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; ie people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Information asymmetries, insurance markets, applied econometrics
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Actuarial Science & Insurance > Faculty of Actuarial Science & Insurance Actuarial Research Reports
URI: http://openaccess.city.ac.uk/id/eprint/2328

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics