Testing for adverse selection in insurance markets

Alma Cohen*, Peter Siegelman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

230 Scopus citations

Abstract

This article 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 adverse selection, and we discuss methods for distinguishing between them. Finally, we review the evidence on learning by policyholders and insurers.

Original languageEnglish
Pages (from-to)39-84
Number of pages46
JournalJournal of Risk and Insurance
Volume77
Issue number1
DOIs
StatePublished - Mar 2010

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