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I know that I don’t know what you do

I know that I don’t know what you do. Informational asymmetry from the insurer’s point of view Orsolya Rétallér Corvinus University of Budapest. Theoretical background. Informational asymmetry in the insurance market. Competitive market – single period (Rotschild and Stiglitz, 1976)

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I know that I don’t know what you do

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  1. I know that I don’t know what you do Informational asymmetry from the insurer’s point of view Orsolya Rétallér Corvinus University of Budapest

  2. Theoretical background Informational asymmetry in the insurance market • Competitive market – single period(Rotschild and Stiglitz, 1976) • Monopol market – single period(Stiglitz, 1977) • Competitive market – multi period(Cooper and Hayes, 1987 and Kuntreuther and Pauly, 1985) • Monopol market – multi period(Dionne, 1983 and Dionne and Lassere, 1985) My goal:Making adverse selection visible TÁMOP-4.2.2/B-10/1-2010-0023

  3. Assumptions General Assumptions • No influence on the risk • Insurance is not mandatory • Insurer is in monopol position • Initial number of policyholders • Policyholders are not distinguished • Insured asset worth 1 • Maximum number of losses per year: 1 • Amount of loss is independent from the number of losses • 10 period of time TÁMOP-4.2.2/B-10/1-2010-0023

  4. Model structure Permanent data • Continuous Risk • Type of Risk • Discrete Risk Period-dependent data • Policyholder Dummy • Presumed Risk • Loss Dummy • Amount of Loss • Actual Risk TÁMOP-4.2.2/B-10/1-2010-0023

  5. A series of simulations Initial number of policyholders: 1,000 Premium principle: net premium principle Maximal risk: 100% Premium tolerance: 5% TÁMOP-4.2.2/B-10/1-2010-0023

  6. A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

  7. A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

  8. A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

  9. A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

  10. A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

  11. Hypotheses H1 H2 H4 H3 The lower the discrete risk is, the faster the group terminates the contract. The number of policyholders is decreasing over time. The premium is increasing over time. The cumulative profit for 10 periods is negative. TÁMOP-4.2.2/B-10/1-2010-0023

  12. ResultsInitial Frequencies

  13. ResultsDistribution of Amount of Losses

  14. ResultsMoral Hazard TÁMOP-4.2.2/B-10/1-2010-0023

  15. ResultsPolicyholders’ Risk Assumptions TÁMOP-4.2.2/B-10/1-2010-0023

  16. Results of Hypotheses H1 The number of policyholders is decreasing over time. TÁMOP-4.2.2/B-10/1-2010-0023

  17. ResultsPolicyholders’ Risk Assumptions TÁMOP-4.2.2/B-10/1-2010-0023

  18. Results of Hypotheses H1 The number of policyholders is decreasing over time.  TÁMOP-4.2.2/B-10/1-2010-0023

  19. Results of Hypotheses H2 The premium is increasing over time. TÁMOP-4.2.2/B-10/1-2010-0023

  20. TÁMOP-4.2.2/B-10/1-2010-0023

  21. Results of Hypotheses H2  The premium is increasing over time. TÁMOP-4.2.2/B-10/1-2010-0023

  22. Results of Hypotheses H3 The cumulative profit for 10 periods is negative. TÁMOP-4.2.2/B-10/1-2010-0023

  23. TÁMOP-4.2.2/B-10/1-2010-0023

  24. Results of Hypotheses H3  The cumulative profit for 10 periods is negative. TÁMOP-4.2.2/B-10/1-2010-0023

  25. Results of Hypotheses H4 The lower the discrete risk is, the faster the group terminates the contract. TÁMOP-4.2.2/B-10/1-2010-0023

  26. ResultsInitial Frequencies

  27. Results of Hypotheses H4 The lower the discrete risk is, the faster the group terminates the contract.  TÁMOP-4.2.2/B-10/1-2010-0023

  28. Conclusions • Adverse selection might have major influences on the • Number of policyholders • Premium • Loss expenses • Premium income • Profit • Gender directive – role of adverse selection is enhancing • Simulations as tools for observing adverse selection TÁMOP-4.2.2/B-10/1-2010-0023

  29. ?

  30. Todownloadmypaper and modelpleasevisit: https://sites.google.com/site/orsiretaller/kutatas-research TÁMOP-4.2.2/B-10/1-2010-0023

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