Dr David Rowell presents at the IME conference

On 17 July 2018, Dr David Rowell presented two talks on asymmetric information, at the Insurance, Mathematics and Economics (IME) conference, UNSW, Sydney.

1. Separating equilibria: Some theory and evidence in Australian market for automobile insurance (Rowell, D. & Zweifel, P. 2018)

Abstract

The objective of this paper is to prepare the theoretical ground for more ample research into the behaviour of consumers and insurance companies in the presence of adverse selection. As noted by Mimra and Wambach (2014), there has been little progress in testing the importance of adverse selection and the prevalence of separating vs. pooling equilibria. The proposed way forward is to model consumers in their search for maximum coverage at a given premium and insurers in their effort to stave off high risks (and attract low ones). Reaction functions are derived for the two players giving rise to Nash equilibria in efforts space, which typically are separating between high and low risks. These equilibria are then projected into the wealth level space of the Rothschild-Stiglitz (1976) model. Moreover, displacements of the Nash equilibria due to (i) community rating of premiums, (ii) provision of information to consumers free of charge, and (iii) learning from loss experience by insurers are used to extend the set of empirically testable predictions beyond conventional approaches. Preliminary empirical evidence from the Australian market for automobile insurance provides a measure of support for the model in effort space.

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2. Empirical tests for consumer-push and producer-pull ex post moral hazard in a market for automobile insurance (Rowell, D, Nghiem H.S., & Connelly L.B., 2018)

Abstract

Ex post moral hazard arises when the insured has an unobservable influence on the size of a loss after its occurrence. In automobile (property) insurance, ex post moral hazard could be caused by “consumer-push and/or “producer-pull” as both parties may gain from receiving or performing more extensive and expensive repairs. An analysis of 994 Australian road traffic crashes found that producer-pull adds 29.1 per cent to the cost of repairs, while consumer-push had no statistically significant effect. The cost of ex post moral hazard outweighs reported estimates of ex ante moral hazard, by a ratio of three to one.

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Last updated:
18 December 2018