Abstract
An increase in an insurance policy’s premium, holding the deductible constant, should increase the average claim frequency for the policy if the insurance market is subject to an adverse selection process. A model of adverse selection is developed to test this proposition using data on collision insurance in Canada over the period 1974–1986. The equations for the demand for collision insurance and for the average claim frequency for the policy are derived assuming that consumers have a constant absolute risk aversion utility function and that the underlying distribution function for the probability of loss is a member of the gamma distribution. The parameters of the models are estimated using a nonlinear estimation procedure, and a linear version of the model is also estimated. In general, the results are consistent with the presence of adverse selection in the market.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
Abel, A. (1986). “Capital Accumulation with Adverse Selection and Uncertain Lifetimes,” Econometrica 1079–1098.
Akerlof, G. (1970). “The Market for Lemons: Qualitative Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, 488–500.
Arnott, R., and J. Stiglitz. (1986). “Moral Hazard and Optimal Commodity Taxation,” Journal of Public Economics 29, 1–24.
Boyer, M., and G. Dionne. (1987). “Description and Analysis of the Quebec Automobile Insurance Plan,” Canadian Public Policy 13, 181–195.
Boyer, M., and G. Dionne. (1989). “An Empirical Analysis of Moral Hazard and Experience Rating,” Review of Economics and Statistics 71, 128–134.
Cooper, R., and B. Hayes. (1987). “Multi-Period Insurance Contracts,” International Journal of Industrial Organization 5, 211–231.
Dahlby, B. G. (1983). “Adverse Selection and Statistical Discrimination: An Analysis of Canadian Automobile Insurance,” Journal of Public Economics 20, 121–130.
Dahlby, B. G., and D. S. West. (1986). “Price Dispersion in an Automobile Insurance Market,” Journal of Political Economy 94, 418–438.
D’Arcy, S. P., and N. A. Doherty. (1990). “Adverse Selection, Private Information, and Low Balling in Insurance Markets,” Journal of Business 63, 145–164.
Dionne, G. (1983). “Adverse Selection and Repeated Insurance Contracts,” Geneva Papers on Risk and Insurance 8, 316–332.
Dionne, G., and P. Lasserre. (1987). “Dealing with Moral Hazard and Adverse Selection Simultaneously,” discussion paper, University of Montreal.
Dionne, G., and C. Vanasse. (1988). “Automobile Insurance Ratemaking in the Presence of Asymmetrical Information,” Centre de Recherche sur les
Transports, discussion paper number 603, University of Montreal. Forthcoming Journal of Applied Econometrics.
Doherty, N. A. (1980). “Moral Hazard and Pricing in the U.K. Fire Insurance Market,” Journal of Risk and Insurance 67, 240–257.
Ehrlich, I., and G. S. Becker. (1972). “Market Insurance, Self-Insurance, and Self-Protection,” Journal of Political Economy 80, 623–648.
Hossack, I. B., J. H. Pollard and B. Zehnwirth. (1983). Introductory Statistics With Applications in General Insurance. Cambridge, U.K.: Cambridge University Press. Insurance Bureau of Canada, Automobile Insurance Experience ( Green Book), various years, Toronto.
Kunreuther, H., and M. Pauly. (1985). “Market Equilibrium with Private Information,” Journal of Public Economics 26, 269–288.
Lemaire, J. (1985). Automobile Insurance: Actuarial Models. Hingham, MA: Kluwer-Nijhoff.
Marquis, M. S., and C. E. Phelps. (1987). “Price Elasticity and Adverse Selection in the Demand for Supplementary Health Insurance,” Economic Inquiry 25, 299–313.
Marshall, J. M. (1976). “Moral Hazard,” American Economic Review 66, 880–890.
Pauly, M. V. (1968). “The Economics of Moral Hazard,” American Economic Review 58, 531–537.
Pauly, M. V. (1974). “Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection,” Quarterly Journal of Economics 88, 44–62.
Riley, J. G. (1979). “Informational Equilibrium,” Econometrica 47, 331–359.
Riley, J. G. (1985). “Competition with Hidden Knowledge,” Journal of Political Economy 93, 958–976.
Rothschild, M., and J. Stiglitz, (1976). “Equilibrium in Competitive Insurance Markets,” Quarterly Journal of Economics 90, 629–649.
Rubinstein, A., and M. E. Yaari. (1983). “Repeated Insurance Contracts and Moral Hazard,” Journal of Economic Theory 30, 74–97.
Shavell, S. (1979). “On Moral Hazard and Insurance,” Quarterly Journal of Economics 93, 541–562.
Spence, M. (1977). “Product Differentiation and Performance in Insurance Markets,” Journal of Public Economics 10, 427–447.
Wasawsky, M. (1988). “Private Annuity Markets in the United States: 19191984,” The Journal of Risk and Insurance 55, 518–528.
White, K. J. (1987). “SHAZAM: A General Computer Program for Econometric Methods (Version 5),” American Statistican 41, 80.
Wilson, C. (1977). “A Model of Insurance Markets with Incomplete Information,” Journal of Economic Theory 16, 167–207.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1992 Springer Science+Business Media New York
About this chapter
Cite this chapter
Dahlby, B. (1992). Testing for Asymmetric Information in Canadian Automobile Insurance. In: Dionne, G. (eds) Contributions to Insurance Economics. Huebner International Series on Risk, Insurance and Economic Security, vol 13. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-1168-5_17
Download citation
DOI: https://doi.org/10.1007/978-94-017-1168-5_17
Publisher Name: Springer, Dordrecht
Print ISBN: 978-90-481-5788-4
Online ISBN: 978-94-017-1168-5
eBook Packages: Springer Book Archive