Some Novel Perspectives on Risk Classification

Author: Thomas, R Guy

Source: The Geneva Papers on Risk and Insurance - Issues and Practice, Volume 32, Number 1, January 2007 , pp. 105-132(28)

Publisher: Palgrave Macmillan

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Abstract:

This paper considers a number of novel perspectives on risk classification, primarily in the context of life and critical illness insurance. I suggest that the terminology of “adverse selection” is often misleading, because from a public policy viewpoint, adverse selection may not always be adverse. I suggest that public policymakers should consider the criterion of “loss coverage”, and that in many markets a socially optimal level of adverse selection is that which maximises loss coverage. A review of empirical studies suggests that adverse selection is often difficult to observe in practice; this leads to the concept of propitious selection, and various psychological perspectives on risk classification. I suggest that competition between insurers in risk classification can sometimes be characterised as a malevolent invisible hand, and that public policy should direct competition towards areas that are more clearly beneficial to all insurance customers. I also consider the perspectives of risk classification as blame, the conflict between risk classification and human rights, and the fallacy of the one-shot gambler.The Geneva Papers (2007) 32, 105-132. doi:10.1057/palgrave.gpp.2510118

Document Type: Research article

DOI: http://dx.doi.org/10.1057/palgrave.gpp.2510118

Affiliations: 1: aInstitute of Mathematics, Statistics & Actuarial Science, University of Kent, Canterbury CT2 7NF, U.K., Email: r.g.thomas@kent.ac.uk

Publication date: 2007-01-01