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Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England

Karlsson, Martin and Klohn, Florian and Rickayzen, Ben (2012):
Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England.
Darmstadt, In: Darmstadt Discussion Papers in Economics, [Online-Edition: http://tuprints.ulb.tu-darmstadt.de/4713],
[Report]

Abstract

Our study reexamines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk - although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; ie people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied.

Item Type: Report
Erschienen: 2012
Creators: Karlsson, Martin and Klohn, Florian and Rickayzen, Ben
Title: Are the Dimensions of Private Information More Multiple than Expected? Information Asymmetries in the Market of Supplementary Private Health Insurance in England
Language: English
Abstract:

Our study reexamines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk - although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; ie people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied.

Series Name: Darmstadt Discussion Papers in Economics
Volume: 213
Place of Publication: Darmstadt
Uncontrolled Keywords: Information Asymmetries; Insurance markets; Applied Econometrics
Divisions: 01 Department of Law and Economics
01 Department of Law and Economics > Volkswirtschaftliche Fachgebiete
01 Department of Law and Economics > Volkswirtschaftliche Fachgebiete > Applied Econometrics
Date Deposited: 31 Jan 2016 20:58
Official URL: http://tuprints.ulb.tu-darmstadt.de/4713
URN: urn:nbn:de:tuda-tuprints-47135
Additional Information:

JEL classification: I11; I13; C18

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