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Document Details :

Title: Adverse Selection Spirals
Author(s): DE JONG, Piet , FERRIS, Shauna
Journal: ASTIN Bulletin
Volume: 36    Issue: 2   Date: 2006   
Pages: 589-628
DOI: 10.2143/AST.36.2.2017935

Abstract :
This article discusses risk classification and develops and discusses a framework
for estimating the effects of restrictions on risk classification. It is shown that
expected losses due to adverse selection depend only on means, variances and
covariances of insurance factors and rates of uptake of insurance. Percentage
loadings required to avoid losses are displayed. Correlated information, such
as family history, is also incorporated and it is seen how such information
limits losses and decreases required loadings. Although the evidence suggests
that adverse selection is not, at present, a severe problem for insurers, this
might change if the authorities impose restrictions on risk classification and/or
customers gain an informational advantage (such as better knowledge of their
own risk levels). Application is made to unisex annuity pricing in the UK insurance
market.

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