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 TÁMOP-4.2.2/B-10/ 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

Assumptions TÁMOP-4.2.2/B-10/ 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

Model structure TÁMOP-4.2.2/B-10/ Permanent data Continuous Risk Type of Risk Discrete Risk Period-dependent data Policyholder Dummy Presumed Risk Loss Dummy Amount of Loss Actual Risk

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/

A series of simulations TÁMOP-4.2.2/B-10/

Not specified % % 3 A series of simulations TÁMOP-4.2.2/B-10/

A series of simulations Bernoulli 1 Pareto 2 Gamma 3 Lognormal 4 TÁMOP-4.2.2/B-10/

No moral hazard 1 Significant moral hazard 2 A series of simulations TÁMOP-4.2.2/B-10/

Aware of the risk 1 Developing over time 2 A series of simulations TÁMOP-4.2.2/B-10/

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

Results Initial Frequencies

Results Distribution of Amount of Losses

Results Moral Hazard TÁMOP-4.2.2/B-10/

Results Policyholders’ Risk Assumptions TÁMOP-4.2.2/B-10/

The number of policyholders is decreasing over time. Results of Hypotheses TÁMOP-4.2.2/B-10/

Results Policyholders’ Risk Assumptions TÁMOP-4.2.2/B-10/

The number of policyholders is decreasing over time. Results of Hypotheses TÁMOP-4.2.2/B-10/ 

The premium is increasing over time. Results of Hypotheses TÁMOP-4.2.2/B-10/

The premium is increasing over time. Results of Hypotheses TÁMOP-4.2.2/B-10/ 

The cumulative profit for 10 periods is negative. Results of Hypotheses TÁMOP-4.2.2/B-10/

The cumulative profit for 10 periods is negative. Results of Hypotheses TÁMOP-4.2.2/B-10/ 

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

Results Initial Frequencies

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

Conclusions TÁMOP-4.2.2/B-10/ 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

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To download my paper and model please visit: TÁMOP-4.2.2/B-10/