Insurance loss coverage and social welfare

Mingjie Hao, Angus Smith Macdonald, Pradip Tapadar, R. Guy Thomas

Research output: Contribution to journalArticle

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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.
Original languageEnglish
Pages (from-to)113-128
Number of pages16
JournalScandinavian Actuarial Journal
Volume2019
Issue number2
Early online date8 Sep 2018
DOIs
Publication statusPublished - 7 Feb 2019

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