Insurance loss coverage and social welfare. Issue 2 (7th February 2019)

• Record Type: Journal Article
• Authors: Hao, MingJie; Macdonald, Angus S.; Tapadar, Pradip; Thomas, R. Guy
• Is Part Of: Scandinavian actuarial journal. Volume 2019:Issue 2(2019)
• Page Start: 113
• Page End: 128
• Publication Date: 2019-02-07
• Subjects: Adverse selection -- loss coverage -- social welfare; D82 -- G22; Insurance, Life -- Mathematics -- Periodicals; Insurance -- Mathematics -- Periodicals; 368.01
• DOI: 10.1080/03461238.2018.1513865
• Languages: English
• ISSNs: 0346-1238

Abstract

ABSTRACT: Restrictions on insurance risk classification may induce adverse selection, which is usually perceived as a bad outcome, both for insurers and for society. However, a social benefit of modest adverse selection is that it can lead to an increase in 'loss coverage', defined as expected losses compensated by insurance for the whole population. We reconcile the concept of loss coverage to a utilitarian concept of social welfare commonly found in the economic literature on risk classification. For iso-elastic insurance demand, ranking risk classification schemes by (observable) loss coverage always give the same ordering as ranking by (unobservable) social welfare.