Premium
B ETWEEN ‐G ROUP A DVERSE S ELECTION : E VIDENCE F ROM G ROUP C RITICAL I LLNESS I NSURANCE
Author(s) -
Eling Martin,
Jia Ruo,
Yao Yi
Publication year - 2017
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12097
Subject(s) - adverse selection , underwriting , adverse effect , selection (genetic algorithm) , complement (music) , medicine , economics , actuarial science , computer science , phenotype , chemistry , gene , biochemistry , artificial intelligence , complementation
A BSTRACT This article demonstrates the presence of adverse selection in the group insurance market. Conventional wisdom suggests that group insurance mitigates adverse selection because it minimizes individual choice. We complement this conventional wisdom by analyzing a group insurance scenario in which individual choice is excluded, and we find that group insurance alone is not effective enough to eliminate adverse selection; that is, between‐group adverse selection exists. Between‐group adverse selection, however, disappears over time if the group renews with the same insurer for a certain period. Our results thus indicate that experience rating and underwriting based on information that insurers learn over time are important in addressing adverse selection.