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Provider-induced Asymmetric Information in the Insurance Market

Provider-induced Asymmetric Information in the Insurance Market. Larry Y. Tzeng Jennifer L. Wang Kili C. Wang Jen-Hung Wang. Asymmetric information— Adverse selection Moral hazard There is significantly positive conditional correlation between risk and coverage. Risk—claim

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Provider-induced Asymmetric Information in the Insurance Market

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  1. Provider-induced Asymmetric Information in the Insurance Market Larry Y. Tzeng Jennifer L. Wang Kili C. Wang Jen-Hung Wang

  2. Asymmetric information— • Adverse selection • Moral hazard There is significantly positive conditional correlation between risk and coverage. • Risk—claim • Coverage—high versus low

  3. --Most literatures focus on the asymmetric information between insured and insurer. --Few literatures focus on the asymmetric information caused by provider in health insurance --This paper focus on the asymmetric information caused by provider in automobile insurance of Taiwan

  4. “Provider” in this paper: • Dealer-owned agent (DOA)—who sold automobile as well as automobile insurance, meanwhile he also owned the repair house. • More than 40% of automobile insurance policies are sold through DOA.

  5. In year 2000

  6. Why provider induce more sever asymmetric information? Adverse selection— • DOA sold larger percentage of high coverage contract • The commission incentive for DOA to sell high coverage • “obtain better deal” motive for insured to purchase high coverage • DOA induced greater number of high risk drivers • “Higher expected repair revenue” incentive for DOA • Immune form premium penalty for high risk insured • Get “better car repair service” for high risk insured

  7. Moral hazard— High coverage policies through DOA result in more claim • DOA clear about who has higher coverage can cover higher loss • DOA owned more information about car damage caused by accident • Insurer audit DOA less (insurer tolerate DOA more)

  8. Our hypothesis: Automobile insurance sold through DOA suffers more severe problems of asymmetric information

  9. Empirical methodologies • Chiappori and Salanie’s (2000) approach --residual correlation from two probit regression • Approach similar to Dionne, Gourieroux & Vanasse (2001) --two stage method

  10. Chiappori and Salanie’s (2000) approach and is the correlation coefficient of Predict:

  11. A robust test let when ,and when Predict: should be significantly positive

  12. Approach similar to Dionne, Gourieroux & Vanasse (2001) (a) estimate the occurrence of claim in first stage (b) estimate the choice of coverage in first stage

  13. Predict: is significantly positive is significantly positive

  14. Empirical Results • The asymmetric information do exist in automobile insurance market of Taiwan • The asymmetric information problems in insurance written by DOA are more sever than those through non-DOA channels • From Chiappori and Salanie’s (2000) approach • From robust test • From Approach similar to Dionne, Gourieroux & Vanasse (2001)

  15. Thank you ! All your comments are welcome !

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