Evidence for Adverse Selection in the Automobile Insurance Market
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Abstract[[abstract]]This paper proposes a new method to directly test the existence of adverse selection in the automobile insurance market. By tracing the renewal decisions of the insured, we find that, in Taiwan automobile insurance market, the choice of insurance coverage and the previous-year claim records are positive ly correlated, which can be a result of adverse selection but not of moral hazard. We further find that the loss ratio is positively correlated to the choice of insurance coverage. This indicates that cross-subsidization may exist in the market. The finding of cross-subsidization further strengthens the evidence to support the existence of adverse selection.
[[sponsorship]]European Group of Risk and Insurance Economists