Adverse Selection in Iranian Life Insurance Market

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Mirtaher, Abdolkarim | 2011

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 41876 (44)
University: Sharif University of Technology
Department: Management and Economics
Advisor(s): Fatemi, Farshad
Abstract:
This thesis finds evidence for the presence of adverse selection in the Iranian life insurance market. We use a unique dataset including more than one million policyholders’ profile information alongside their chosen life insurance coverage from the largest Iranian insurance company. Our results not only find evidence in support of adverse selection in this market, but also consider the magnitude of adverse selection relatively notable. Moreover, we found that in addition to the coverage, the other dimensions of contract could be the potential source of adverse selection. Particularly, we focused on the insurance duration and the payment method (monthly, annually, all-in-advance). Empirically we corroborate the fact that long-run contracts for a specific amount of coverage are more favorable than shot-run ones for high-risk policyholders, so the customers can abuse through smart self-selection of insurance duration to exacerbate the adverse selection. Nevertheless, in spite of theoretical expectation we cannot find empirical support in favor of the fact that the frequency of premium payment can foster another source of adverse selection
Keywords:
Asymmetric Information ; Life Insurance ; Contracts Theory ; Adverse Selection ; Semiparametric Method ; Private Information

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