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Can Propitious Selection Prevent Unravelling In Insurance Markets?, Tsvetanka Karagyozova, Peter Siegelman
Can Propitious Selection Prevent Unravelling In Insurance Markets?, Tsvetanka Karagyozova, Peter Siegelman
Peter Siegelman
The theory of adverse selection in insurance markets has been enormously influential among scholars, regulators, and the judiciary. But empirical support for adverse selection has been much less persuasive, and several recent studies have found little or no evidence of such selection in insurance markets. “Propitious” (advantageous) selection offers an alternative mechanism that is consistent with these empirical findings. Like adverse selection, the theory assumes that insureds have an informational advantage over insurers. However, propitious selection relies on the plausible assumption that risk aversion is negatively correlated with the riskiness or probability of looss across insureds—the more risk-averse are also …
Testing For Adverse Selection In Insurance Markets, Alma Cohen, Peter Siegelman
Testing For Adverse Selection In Insurance Markets, Alma Cohen, Peter Siegelman
Peter Siegelman
This paper 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 …