Talk:Adverse selection/Archives/2013

Insurance (auto) example

Hi - first time I have contributed so please accept apologies for anything I've done wrong!

I work in insurance pricing and we don't use this term in exactly the way described. Specifically we do not expect that any customer base will have sufficient knowledge of their own risk in an intrinsic way in order to allow them to understand their own true price. Instead it is a market force when presented with a number of opportunities.

The example I use to teach my new employees is this:

The average cost for motor insurance is 400 per year. There are equal numbers of old and young drivers. The average cost for old drivers is 350 per year, and for young drivers it is 450 per year.

Insurance company A offers all policies at 425 per year. Insurance company B offers policies to old drivers at 375 per year and young drivers at 475 per year.

All drivers select the cheapest premium. Old drviers purchase all policies from Insurance Company B at 375 per year. Young drivers purchase all policies from Insurance Company A at 425 per year.

Insurance Company A sells policies at 425 and pays out 450, losing 25 per policy sold. Insurance Company B sells policies at 375 and pays out 350, gaining 25 per policy sold.

Note that at no point in this example is the risk of a policyholder used to state whether a policy is purchased, only which company it is purchased from. By not assessing the relevant risk Insurance Company A suffers adverse selection in the market presence of Insurance Company B.

Hope that makes sense. Wulfyn (talk) 11:21, 22 May 2011 (UTC)

Hmm, interesting. That sounds to me to be a pretty different usage than is presented here. Would you happen to have a reference that describes the term in that way? I think it would be useful to include that definition as well. AdventurousSquirrel (talk) 07:20, 24 February 2013 (UTC)