Testing for Asymmetric Information Using “Unused Observables” in Insurance Markets: Evidence from the U.K. Annuity Market
Name
Finkelstein_Testing for.pdf
Size
229.52 KB
Format
Adobe PDF
Checksum (MD5)
a1b58d209cd823b77e49c8e12303ccb1
Author(s)
Finkelstein, Amy
Poterba, James M.
Date Issued
February 2014
Journal
Journal of Risk and Insurance
Publisher
American Risk and Insurance Association
Citation
Finkelstein, Amy, and James Poterba. “Testing for Asymmetric Information Using ‘Unused Observables’ in Insurance Markets: Evidence from the U.K. Annuity Market.” Journal Risk and Insurance 81, no. 4 (February 18, 2014): 709–734.
Version
Original manuscript
Abstract
This article tests for asymmetric information in the U.K. annuity market of the 1990s by trying to identify “unused observables,” attributes of individual insurance buyers that are correlated both with subsequent claims experience and with insurance demand but that insurance companies did not use to set insurance prices. Unlike the widely used positive correlation test for asymmetric information, which searches for a positive correlation between insurance demand and risk experience, the unused observables test is not confounded by heterogeneity in individual preference parameters that may affect insurance demand. We identify residential location as an unused observable in the U.K. annuity market of this period. Even though residential location was observed by all market participants, the decision not to condition prices on it created the same types of market inefficiencies that arise when annuity buyers have private information about mortality risk. Our findings raise questions about how insurance companies select the set of buyer attributes that they use in setting policy prices. In the decade following the period that we study, U.K. insurance companies changed their pricing practices and began to condition annuity prices on a buyer's postcode.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1111/jori.12030
