Asymmetric Information and Unobserved Heterogeneity in the Accident Insurance

Posted: 18 May 2013

See all articles by Martin Spindler

Martin Spindler

Max Planck Institute for Social Law and Social Policy; MEA

Date Written: July 23, 2012

Abstract

Testing for asymmetric informations has become very important in recent years in order to test theoretical predictions and to outline new directions for research. In this paper we analyse accident insurance, which has not been analysed before in the literature, but covers one of the most important risks faced by individuals in modern society. We show that there is asymmetric information, but the extent depends on the amount of coverage. Moreover, and most importantly, the option of choosing an annual adjustment of the insured sum has strong predictive power both for the occurence of an accident and the chosen coverage, although it should be irrelevant from the point of theory. This results shows new ways to design contracts and variable selection for risk classification. In contrast to previous studies, we also explicitly take into consideration unobserved heterogeneity by applying finite mixture models and so called 'unused' observables. As shown by DeMeza and Webb (2001), the absence of a positive correlation between risk and coverage is still consistent with asymmetric information if unobserved risk anversion influences both the insurance demand and the risk type.

Keywords: Asymmetric information, Accident insurance, Disability, Unused observables, Positive correlation, Finite mixture model

JEL Classification: D82, G22, C12, C14

Suggested Citation

Spindler, Martin, Asymmetric Information and Unobserved Heterogeneity in the Accident Insurance (July 23, 2012). MEA Discussion Paper No. 260-12, Available at SSRN: https://ssrn.com/abstract=2266345 or http://dx.doi.org/10.2139/ssrn.2266345

Martin Spindler (Contact Author)

Max Planck Institute for Social Law and Social Policy ( email )

Amalienstraße 33
München, 80799
Germany

MEA ( email )

Amalienstrasse 33
Munich, 80799
Germany

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