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Testing For Adverse Selection In Insurance Markets

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Executive Summary

This paper reviews and evaluates the empirical literature on adverse selection in insurance markets. The authors focus on empirical work that seeks to test the basic coverage - risk prediction of adverse selection theory - that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, they argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. They discuss various reasons why a coverage - risk correlation may be found in some pools of insurance policies but not in others. They also review the work on the disentangling of adverse selection and moral hazard and on learning by policyholders and insurers.

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