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 TÁMOP-4.2.2/B-10/1-2010-0023 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

3. Assumptions TÁMOP-4.2.2/B-10/1-2010-0023 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

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

6. 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

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

8. Not specified 1 80-5-5-5-5% 2 5-5-5-5-80% 3 A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

9. A series of simulations Bernoulli 1 Pareto 2 Gamma 3 Lognormal 4 TÁMOP-4.2.2/B-10/1-2010-0023

10. No moral hazard 1 Significant moral hazard 2 A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

11. Aware of the risk 1 Developing over time 2 A series of simulations TÁMOP-4.2.2/B-10/1-2010-0023

12. 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-10/1-2010-0023

13. Results Initial Frequencies

14. Results Distribution of Amount of Losses

15. Results Moral Hazard TÁMOP-4.2.2/B-10/1-2010-0023

16. Results Policyholders’ Risk Assumptions TÁMOP-4.2.2/B-10/1-2010-0023

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

18. Results Policyholders’ Risk Assumptions TÁMOP-4.2.2/B-10/1-2010-0023

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

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

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

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

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

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

27. Results Initial Frequencies

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

29. Conclusions TÁMOP-4.2.2/B-10/1-2010-0023 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

30. ?

31. To download my paper and model please visit: TÁMOP-4.2.2/B-10/1-2010-0023 https://sites.google.com/site/orsiretaller/kutatas-research