You are on page 1of 22



Understanding how insurance is priced

Report from ABI Research Department

By Rebecca Driver, David ONeill and Athena Peppes


Risk classification, or risk pricing, is fundamental to the way insurance markets work.
It allows insurers to charge a premium that reflects the probability and severity of loss.
They can then pool similar risk types and share risk amongst them.

This paper examines the economic benefits of risk classification. First, risk
classification contributes to economic efficiency. It allows the price of insurance to
better reflect the cost of providing insurance coverage. This is important because it
enables a more efficient allocation of scarce resources.

Secondly, it limits adverse selection. A single price for different risks may lead to
higher average premiums, as there is cross-subsidisation of high risks by low risks. As
a result, low risks might be encouraged to leave the market. For example, there is
evidence of adverse selection in the health insurance market, following the
introduction of rating restrictions in 47 USA states between 1991-1996.

Thirdly, risk classification reduces moral hazard. As individuals bear a cost for their
actions, it provides incentives to mitigate risky behaviour and therefore reduce
potential losses. This can have positive external effects on the rest of the economy.
For example, people might have an additional incentive to stop smoking, so that they
can buy cheaper health insurance. This contributes to a healthier, more productive

Finally, risk classification encourages innovation and competition within the insurance
industry. Insurers have incentives to create new products and serve new markets.
Consumers benefit from this. Telematic-based motor insurance schemes and the
widespread availability of flood insurance for homes as a result of improved flood
modelling demonstrate this.




2.0 Risk classification and economic efficiency 8

2.1 The evidence on the impact of restricting risk classification 9
2.2 The benefits of market segmentation for coverage 10

3.0 Risk classification restrictions and market failure 12

3.1 Adverse selection 12
3.2 Moral hazard 14
3.3 Externalities 14
3.4 Market power 15

4.0 Risk pricing and innovation 17

4.1 Telematics-based motor insurance 17
4.2 Flood insurance 17
4.3 The rewards from innovation 18



Figure 1 Efficiency of risk classification 8



The grouping of risks with similar risk characteristics for the purpose of
setting prices is a fundamental precept of any workable private,
voluntary insurance system. (American Academy of Actuaries)

Insurance provides protection against risk. Individuals and organisations buy insurance
to help them manage these risks. The extent to which they need insurance will in part
depend on how risky they are: those individuals who face a higher probability of a
given event happening will potentially benefit more from insurance. However, demand
for insurance will also depend on the extent to which they are risk averse. Highly risk
averse individuals are more likely to want insurance for the peace of mind it brings. It
should not therefore be assumed that higher risk types purchase more insurance
coverage because of their greater risk exposure. In reality, low-risk individuals might
be more risk averse than high-risk types.

Insurers need to earn sufficient income from premiums so that they can cover
anticipated claims. This means that they must accurately measure the average
expected loss in any given period and charge a price for insurance accordingly.
Insurance is therefore based on two key principles. The first is the principle of
actuarial equivalence. This means that the insurance premium reflects the
individuals risk, including the severity and probability of loss, so the insured pays a
premium proportional to their expected future benefits (see for example Wolgast
(2005)). The second is that of risk solidarity within risk pools, which means that the
risk is shared between the participants of a risk pool. This requires that insurers, who
construct these pools, are able to differentiate between risk types by using information
about their characteristics. It includes personal characteristics over which the
individual has no control, such as gender and age, and behavioural characteristics,
such as smoking and physical exercise, which involve individual choice. They then pool
individuals of similar risk type and share out the risk amongst the pool participants
(see for example Faure (2006)). As premiums reflect an individuals risk, risk
classification also provides an incentive for the insured to assess, manage and reduce
their risk and hence benefit from lower premiums. This is also beneficial for society, as
there is a reduction in the external costs that high-risk types impose on third parties.

Allowing insurers to use risk classification also limits adverse selection. This is a
situation where a single price would lead to higher average premiums, as the high
risks are subsidised by the low risks. This can lead to low-risk customers not
purchasing a policy, as it will not represent good value for them. It will also lead to
higher costs for the higher risk individuals.

Another benefit of risk classification is that it encourages innovation as it allows

insurers to compete on price and product offerings. Consumers benefit as they can
obtain insurance that was previously unavailable to them.

This report is a brief survey of the reasons why risk classification is important and the
benefits for consumers and firms. The report is structured as follows. Section 2


discusses how the presence of risk classification helps the market work efficiently.
Section 3 examines how restrictions on risk classification can lead to market failure,
including adverse selection and moral hazard. Section 4 shows that risk classification
can encourage product innovation and how this benefits consumers.



Risk classification helps the insurance market work efficiently. It uses available
information to calculate a cost-reflective price, where the marginal cost of premiums is
equal to the marginal benefit of the coverage. This is a resource allocation where no
one can be made better off without making someone else worse off, which indicates
that the economic gains for consumers and producers are maximised. It is
economically efficient and usually referred to as a Pareto-optimal outcome.

Figure 1 Efficiency of risk classification






L2 L1 L* H * H2 H1 Quantity of insurance

Source: Scharze R. and Wein T. (2000)

We can demonstrate how risk classification leads to a welfare, or Pareto, maximising

outcome diagrammatically. Assume that there are two risk types with different
demand curves for voluntary insurance.1 The high-risk types have a demand curve of
DH and the low-risk group DL. The demand curve for the high-risk group is to the right
of the low-risk group curve, because at any given price, the high risks demand more
coverage. If risk classification is allowed the low-risk group pays PL and the high-risk
group pays PH and in the equilibrium state demand is (L*, H*).2 If risk classification is
restricted so that both types pay the same average price P1, then the low-risk types
will demand L1 quantity of insurance and the high-risk types will demand H1. However,
due to the increased proportion of high risk to low risk types, the average price of
coverage rises to P2.3 High-risk individuals demand more insurance, H2, and low-risk

For compulsory insurance, such as motor or employers liability, demand is fixed by law, although you can
increase the level of coverage. For example, an individual can buy third-party motor insurance or
comprehensive insurance.
This is referred to as a separating equilibrium.
There are more high-risk types, encouraged by the relatively low cost of insurance and less low-risk types
discouraged by the relatively high cost of insurance.


individuals demand less insurance, L2, compared to a situation where risk classification
is allowed.4

When risk classification is allowed, for each type the price reflects the cost of their
insurance coverage. This leads to two types of efficiency gains.

The first gain is equivalent to area b. It is a net gain that arises because low-risk types
now consume the optimal amount of coverage, whereas when risk classification is
restricted, and there is an average price in the market, they under-consumed. This is
because they were effectively taxed for purchasing insurance.

The second gain is equivalent to area a. It arises because the high-risk types are not
subsidised and they pay a premium that reflects their cost. Hence, society no longer
bears the costs of the high-risk individuals. An example is the costs that unsafe drivers
impose on other road users. When risk classification is restricted, society incurs costs
equivalent to area a, as low-risk types effectively subsidise the high-risk types,
encouraging them to over-consume insurance.

The above analysis is subject to limitations. For example, it supposes that a move from
a pooling to a separating equilibrium would lead to insurers being able to infer the type
of the individual from their choice of contract. It is also assumed that high-risk
individuals will demand more insurance because they have a higher risk exposure.
However, this analysis does not take into account individual risk preferences. This
issue is explored further in section 3.1.1.

2.1 The evidence on the impact of restricting risk classification

Overall the evidence suggests that the impact of restricting insurers ability to use risk
classification is in line with what the theory would predict.

2.1.1 The French annuity market

In France the conditions under which insurers must draw up their rates in the field of
life insurance and pensions are governed by the Insurance Code. Insurers use the
prescribed tables drawn up on the basis of data published by the National Institute of
Statistics and Economic Studies (INSEE) and confirmed by Government decree. The
tables are unisex and are used for men and women. The result, in both cases, is that
premiums are equal, but not equitable. The table used for term life insurance was
drawn up on the basis of male mortality, with the result that women pay the same,
higher, life insurance premiums as men. The predictive table used for life annuity
contracts was drawn up on the basis of female mortality, with the result that when
men buy an annuity, for a given pension fund they receive the same, lower, amount as
women (Woolnough 2004).

This is referred to as a pooling equilibrium.


2.1.2 Motor insurance in Montana, USA

In 1985, Montana passed a law prohibiting the use of sex or marital status as rating
factors for motor insurance (and in fact for all personal lines of insurance). A 1987
survey of twelve leading insurers found that all women drivers and young married
drivers, who are lower risk drivers, had to pay higher premiums. A 23 year-old married
man faced an increase of 26-29% in their motor insurance premium. A 23 year-old
married woman faced a 56-59% increase (Society of Actuaries in Ireland).5

2.1.3 Individual healthcare coverage in the USA

The USA Congressional Budget Office released an empirical study that examines how
the insurance process affects healthcare coverage in the non-group market. The
authors imputed premiums by examining the strength of various state community
rating regulations. Community rating laws limit the extent to which insurers can
charge different prices to individuals with varying medical conditions. A statistically
significant result was that after holding a variety of other factors constant, more
individuals choose to forgo coverage in states with strict community rating laws.
Overall the analysis suggested that community rating laws increase the cost of health

Simon (2004) finds evidence of adverse selection, following the introduction of reforms
for small group health insurance in 47 USA states between 1991-1996.6 There were
two main changes. Rating restrictions, which limited the insurers ability to use certain
predictors of health care in setting premiums, and guarantee issue laws, which meant
that insurers could not refuse to issue a policy. Using econometric analysis the author
finds that there was a fall in the average healthcare coverage rates following the
introduction of the restrictions and a decline in the coverage rates for the low-risk
group. Both of these findings are consistent with the impact of adverse selection on
the market, discussed earlier.7

2.2 The benefits of market segmentation for coverage

Risk classification allows segmentation of the market. There are incentives for insurers
to find profitable ways of catering for segments of the market that were previously

The FSA also estimated that imposing equal underwriting rates for men and women would mean that younger
women have to pay between 10-30% more for motor insurance. Premiums for younger males would be
reduced but overall costs would be likely to rise, as insurers would be taking the risk of writing
proportionately more cover for higher-risk men. Source: House of Lords, EU Committee, 27th Report,
Chapter 9, article 7, Gender and motor insurance
Small group refers to firms who employ less than 25 workers.
Simon (2004) estimates regression models for certain outcomes, such as the premium paid by the firm per
worker, employee contribution paid by the worker, whether the firm offers health insurance and the fraction
of workers who are covered. In the states with full reform (rating reform and guarantee issue) there was a
2-percentage point decline in coverage rates on average, statistically significant at the 1% level. The effect
of this type of reform on the low-risk group was a statistically significant decline in coverage rates of 6.2
percentage points.


uninsured, by setting the right price. Risk classification fosters specialisation and the
development of niche markets.

Previously, those with significant health problems, such as heart conditions and cancer
were unable to obtain life insurance, and young people with criminal convictions
struggled to purchase motor insurance. There was therefore a gap in the market. Risk
classification means that insurers can charge a price that covers the costs of protecting
these individuals. It also enables insurers to separate this higher risk group from the
rest of the insurance pool. Hence they are able to develop a new market to provide
insurance for these higher risk types. This has led to motor insurance specialists for
young drivers with convictions and impaired life insurance for those with health
conditions, such as diabetes. In the past, if an individual was diagnosed with diabetes,
then the condition was completely excluded from the contract. However, nowadays,
insurance companies examine such cases in depth. The price and coverage depend on
the type of diabetes, treatment necessary, health regime and so on. This enables more
individuals to benefit from insurance coverage. On the other hand, if risk classification
were not allowed then the ability of insurers to find profitable ways of insuring these
segments would be restricted.

Similarly, data from Swiss Re shows that 30 years ago some people who had suffered
from stage 2, and all who had suffered from stage 3, testicular cancer could not
purchase life insurance. However, as medical advances have improved survival rates
insurers have tracked changes in outcomes and adjusted their rating factors to allow
them to differentiate between high and low risks within groups of customers
recovering from testicular cancer. Accordingly, individuals recovering from early stage
2 testicular cancer are now able to buy life insurance cover as soon as treatment has
been succesfully completed. For advanced stage 2 and stage 3 disease, where the
cancer has spread more widely and risk of recurrence is greater, life insurance cover is
available within 2-4 years of succesfully completing treatment.




This section discusses how placing restrictions on insurers ability to use risk
classification can lead to market failure. Market failures include information asymmetry
(adverse selection and moral hazard), externalities and market power. This section
looks at risk classification in the context of these market failures. It discusses the
impact on the market of the interaction of these factors with insurers ability to use
risk classification to price insurance.

3.1 Adverse selection

Adverse selection arises when there is information asymmetry so that the insurance
company cannot differentiate between the risk profiles of its customers. If, as a result,
all customers are charged an average price, it can lead to low-risk customers not
purchasing a policy, as it will not represent good value for them. There is strong
evidence that adverse selection exists in insurance markets. Finkelstein and Poterba
(2004) find evidence of adverse selection in the U.K. annuity market. They find that
longer-lived annuitants select annuities with back-loaded payment streams and
shorter-lived annuitants select annuities that make payments to the annuitants estate
in the event of early death.

Information asymmetry can lead to adverse selection problems and, to the extent that
information is private and cannot be observed, or inferred from other characteristics, it
will always exist. A regulatory requirement that prices are uniform may have a similar
impact. Where price differentiation between risk types is not allowed, insurers could
respond by charging a premium based on average risk. Hence, low-risk types are
grouped with high-risk types and they all face the same unit price. Low-risk individuals
may drop out of the market altogether, as the price of insurance is higher than their
willingness to pay.8 In effect they are taxed, whereas the high-risk group is subsidised.

As the low-risk group exits the market, the average premium will increase further for
those remaining in the pool. The group now at the bottom-end of the risk spectrum -
for whom the price is higher than their willingness to pay - will also leave the market.
This combination of increasing premiums and shrinking insurance pools is unstable. In
an extreme situation the market could be driven out of existence.

Some low-risk individuals might stay in the pool, either due to compulsion or because
the severity of loss is so high that they would prefer to have some insurance coverage.
In this case, it is likely that they will buy less insurance than they would like, in

Akerlofs market for lemons analysis shows that such an outcome is unstable, see Akerlof (1970).


comparison to the risk classification scenario.9 They also pay more for it than they
would if risk classification were allowed.

It could be argued that the potential for underinsurance by low-risk individuals can be
minimised by making insurance mandatory. However, there will still be cross-
subsidisation of risks. This raises equity issues. For instance, in the case of motor
insurance, young women on low incomes with children, who according to statistics are
safer drivers, will pay higher premiums to subsidise young men with poor driving
habits. This will have a negative impact for all road users. It also raises issues
surrounding risk-taking incentives, and these are discussed in the next section.

According to Hoy (2005) adverse selection arising from regulation (regulatory adverse
selection) is less likely to reduce welfare in situations where the fraction of the high-
risk population is relatively small. An example is that of insurers using predictive
genetic testing results in underwriting insurance. The ABI has a voluntary agreement
with the government that prohibits the use of such information, with the exception of
Huntingtons disease above set financial limits. The efficiency effects of such a ban are
likely to be small because the number of insureds that undertake predictive genetic
tests and the extent to which they were used in underwriting was relatively small.
Therefore the equity gains might outweigh efficiency losses.

3.1.1 Propitious selection

The analysis of adverse selection assumes that high-risk individuals will demand more
insurance. However, this does not take into account individual risk preferences.
Studies have suggested that this omission might explain the difficulty in identifying
evidence of adverse selection in insurance markets.10

Hemenways (1990) idea of propitious selection claims that potential insurance

buyers have different risk preferences and individuals who are highly risk-avoiding are
more likely both to try to reduce the hazard and to purchase insurance. For example,
he finds that motorcyclists who wear a helmet are more likely to hold medical
insurance.11 Therefore, contrary to the predictions of the adverse selection theory,
there could be a situation where highly risk-averse insureds with a low probability of
loss are willing to remain in the market, despite an actuarially unfair premium.
Finkelstein and McGarry (2003) find supportive evidence in the U.S. market for long-
term care insurance. They find that individuals who behave more cautiously in terms of
preventive health care activities are both more likely to own insurance and less likely
to use long-term care.

However, the evidence is not conclusive. Cohen and Einav (2005) find that those who
make a number of claims on their motor insurance had chosen higher coverage

Assuming that consumers have complete information about insurers and their products.
Hemenway (1990), De Meza and Webb (2001), Finkelstein and McGarry (2003)
Based on U.S. data.


policies (or chosen policies with a lower deductible). Moreover, there could be a third
factor, which is associated with increased demand for insurance and low-risk type.
Fang, Keane and Silverman (2006) emphasize the role of cognitive ability in the
context of the U.S. Medigap insurance. More sophisticated customers are better able to
understand the need for insurance and therefore demand more coverage. They also
take more precautions and therefore have better health (Fang, Keane and Silverman
(2006) cited in Karagyozova and Siegelman (2006)).

3.2 Moral hazard

Moral hazard arises when the provision of insurance changes the likelihood of the
event being insured against taking place. This is because it distorts behaviour and can
encourage risk taking by the parties involved. It differs from adverse selection because
it arises after the insurance contract has been agreed.

Under risk classification the premium reflects risk and individuals bear the cost of their
actions. This reduces moral hazard in a market where individuals can control their risk
and there are repeat purchases, such as motor and property insurance, so that past
claims history can affect future premiums. Lower future premiums are an incentive to
mitigate risky behaviour. For instance, people might have an additional incentive to
avoid behaviour likely to lead to a claim, so that they can buy cheaper motor
insurance. In contrast, if risk classification is not possible individuals have limited
additional incentives to mitigate risky behaviour.

Mullins (2004) examines motor insurance across Canadian provinces. He presents data
to support the supposition that cross-subsidisation leads to moral hazard. He finds that
Canadian provinces with private sector insurance (Ontario, Alberta and the Atlantic
region) had annual claims rates of 8-10%, between 1993-2002. On the other hand,
British Columbia with a purely public motor insurance system had a claims rate of
around 38%. In addition, public insurance schemes had proportionately more than
four times as many young drivers, who are higher risk, as the rest of Canada
(excluding Quebec) (Mullins 2003).12 This may indicate that subsidising high-risk
individuals will encourage them to undertake the risky activity - as there are higher
claims and more young drivers in states where premiums do not reflect costs.

3.3 Externalities

By charging customers accurately for the risks that they represent, risk classification
can reduce negative externalities. For example, high risk-related motor insurance
premiums for younger drivers can reduce the number of young drivers. This can lower
the external costs that young drivers impose on third parties, which is beneficial from
a social welfare perspective.

Mullins (2003) also took into account the effect of different demographic profiles.


If risk classification is restricted, low-risk individuals will cross-subsidise higher risk

individuals. As the high-risk individuals do not bear the cost of their actions, they do
not have incentives to limit such risky behaviour. Negative externalities could arise as
the private optimum level of consumption differs from the social optimum. In the
example of motor insurance, there may be over-consumption, as risky drivers
engage in more driving and in unsafe driving.

However, equity arguments arise when individuals are not able to mitigate their risk.
Characteristics such as gender, age and genetic make-up are pre-determined and can
be beyond control. On the other hand, safe driving and lifestyle choices (e.g. smoking,
diet etc.), which can also affect premiums, can be controlled. Some could argue that it
is unfair to penalise individuals for uncontrollable factors and hence they should not
be taken into account when calculating premiums. However, these equity arguments
need to be balanced against the efficiency losses and other fairness losses that will
arise if risk classification is not allowed.

In addition, in a world of repeat purchases, over time individuals will be able to

demonstrate from their claims history that they represent a good risk, relative to the
rest of their group, which will help them control their premiums.

3.4 Market power

The potential impact of limiting risk classification on competition is twofold. Insurers

may leave the market, as limits on risk classification mean that their products are not
viable and they make losses. In addition, the restrictions create barriers to entry as
potential entrants can be restricted by rate regulation that can for example prevent
them from specialising and targeting niche markets. Hence, incumbents face less
competition. Both effects might diminish the competitive forces in the market. The
Illinois voluntary motor insurance market is the only one in the USA without formally
regulated rates in this area. This might explain why it has roughly twice the number of
motor insurers (129) compared to New Jersey (67), where rates are tightly regulated
(Litan (2001)). Consumers may also lose out, as they have less choice of products and
providers. Moreover, it may hinder innovation of new products; this is covered in
section 4.

Grace, Klein and Phillips (2001) examine regulatory reforms in the South Carolina
motor insurance market. Prior to 1999, when there was relaxation of rate and
underwriting restrictions, insurers had limited flexibility in tailoring their pricing
structures. They could not charge premiums corresponding to a drivers relative risk
and expected loss. South Carolina was perceived to have stringent regulations
compared to the other regional states in the South East.13 They find that there appears
to be a fall in potential competition in the market, as the number of insurers selling
motor insurance dropped by 20%, from 56 to 45 by 1998, although it rose to 55 in

The Southeast region includes Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. The
authors note that Georgia and North Carolina were also perceived to have stringent regulations.


1999, probably in anticipation of the reforms. In comparison, in the South East, the
average number of motor insurers declined by 12%, from 99 to 87, between 1990 and
1998. They also compare Herfindahl-Hirschman index (HHI) values for South Carolina
against regional averages over the 1990s.14 In South Carolina, the HHI increased from
1,195 in 1990 to 1,540 in 1998. In comparison, the regional average HHI remained
relatively constant over this period and was 1,085 in 1998. Although concentration in
South Carolina did not reach a level that would generate concern about adequate
competition, its increase was linked to increasing regulation between 1975 and the
deregulation reforms of 1999.

This measures the size of the firms in relation to the industry and the competition between them. An
increase in the HHI generally indicates an increase in pricing power and a decrease in competition.



Another economic benefit of risk classification is that it encourages innovation. As

discussed earlier, risk classification enhances competition in the market. One of the
ways in which insurers can compete is through innovation on product and price. To be
more successful than its competitors, an insurer has the motivation to become more
refined in their risk classification system and pricing structure. This can lead to new
insurance products and new markets. Consumers will benefit in two ways. They will
pay a price that better reflects their expected costs and they will be able to obtain
insurance products that were previously unavailable to them.

The UK industry has one of the most sophisticated rating structures in the developed
countries. This can partly be attributed to the regulatory environment, which has
allowed insurers to develop their pricing structures.

Some examples of how risk classification has encouraged innovation are discussed

4.1 Telematics-based motor insurance

Telematics-based motor insurance is available from some insurers in the UK. The
premium is fixed according to when, where and how far you drive. Competition has
incentivised insurers to develop a more sophisticated method of pricing risk according
to peoples driving habits, in addition to personal characteristics, such as age and
gender. One insurer estimates that the system has achieved savings of up to a third
and reduced fatalities among young drivers by 20% (Insurance Times 2007).

4.2 Flood insurance

Insurance companies in the UK have invested in improved regional flood models. Some
insurers have also developed digital maps that can be used to pinpoint the risk of river
flooding to individual properties. The benefit to insurers is to enhance their
understanding of, and therefore ability to price, flood risk. It also seeks to ensure that
future claims costs are covered. A better understanding of the risk will lead to more
competitive premiums, which in turn gives the insurer the opportunity to capture a
larger section of the property insurance market. Consumers benefit, as they pay a
premium that better reflects their risk of flooding. Moreover, there is continued
availability of affordable buildings and contents insurance. This is particularly
important as lenders include buildings insurance as a requirement in mortgage
applications. One insurer estimates that more than 600,000 additional properties in
flood risk areas could now qualify for insurance due to the information provided by
their flood map.


4.3 The rewards from innovation

There is evidence of a first mover advantage in introducing new risk factors. Schwarze
and Wein (2005) test whether risk classification creates information rents for
innovative firms. They study the effect of applying new risk characteristics on firm-
specific loss ratios in the third-party motor insurance industry in Germany. Firms who
introduced valid risk determinants as first movers, following the deregulation of the
market in 1994, were able to reduce their loss ratio (increase profitability) and make
others pay in the form of a higher loss ratio. This was not a lasting economic benefit
for the inventors, as its effects seem to disappear after about two years. However, it
illustrates that risk classification provides strong incentives, i.e. improved profits
compared to competitors, to innovate in terms of risk classification and bring benefits
for consumers.



Akerlof, G.A. (1970), The market for lemons: Qualitative Uncertainty and the market
mechanism, Quarterly Journal of Economics, Vol. 84 (Aug), 499-500
American Academy of Actuaries, Risk Classification Statement of Principles
Barr, N. (2000), Economics of the welfare state, Oxford University Press
Buchmueller, T. and DiNardo, J. (2002), Did community rating induce an adverse
selection death spiral? Evidence from New York, Pennsylvania and Connecticut,
American Economic Review, vol 92 (1), 280-294
Cohen, A. and Einav, L. (2005), Estimating risk preferences from deductible choice,
NBER Working Paper 11461, June 2005
Curry, C. and OConnell, A. (2004), An analysis of unisex annuity rates, Pensions Policy
Institute, commissioned by the Equal Opportunities Commission
EFA, ABI and GriD (2006), The Employment Equality (age) Regulations 2006: The threat
to employees insured benefits
Fang, H., Keane M. and Silverman D. (2006), Sources of advantageous selection:
evidence from the Medigap Insurance Market, Working Paper, Yale Department of
Faure, M. (2006), Risk differentiation endangered by recent policy trends? Insurance
Economics, No. 53 (January 2006), 1-3
Finkelstein, A. and Poterba, J. (2004), Adverse selection in Insurance Markets:
Policyholder Evidence from the UK Annuity Market, NBER Working Paper 8045
Finkelstein A. and McGarry K. (2006) Multiple dimensions of private information:
evidence from the long-term care insurance market, American Economic Review,
96(4), pp938-958
Flack, T. (2007), Curbing young driver deaths, Insurance Times, 26th April 2007
Grace, M.F., Klein, R.W. and Phillips, R.D. (2002), Auto Insurance reform: salvation in
South Carolina, pp148-194, in Cummins J.D. (ed.) Deregulating Property-liability
Insurance: restoring competition and increasing market efficiency, Brookings
Institution Press
Hemenway, D. (1990) Propitious selection, Quarterly Journal of Economics, vol 105, pp
House of Lords European Union Select Committee (2004), Gender and Annuities: a
special issue for Britain, 27th Report, Chapter 8: Article 4
Hoy, M. (2005), Risk classification and social welfare, The Geneva Papers, vol 31 (2), pp
Karagyozova T. and Siegelman P. Is there propitious selection in insurance markets?,
Working Paper 2006-20, University of Connecticut, Department of Economics
Litan, R.E. (2001), State regulation of auto insurance, Testimony before the
Subcommittee on Oversight and Investigations of the House Committee on Financial
MacDonnell, P. (2005), Equal treatment directive misunderstands risk and threatens
insurance markets, Institute for Economic Affairs, Blackwell Publishing
Mullins, M. (2004), Lemons and Peaches: Comparing auto insurance across Canada, The
Fraser Institute Auto Insurance Series
Mullins, M. (2003), Public auto insurance: a mortality warning for motorists, The Fraser
Institute Auto Insurance Series
Munich Re International rate comparison
New, M.J. (2006), The effect of state regulations on health insurance premiums: a
revised analysis, The Heritage Foundation, p. 3
Norwich Union (2006), UK: Norwich Union launches innovative Pay As You Drive
insurance with prices from 1p per mile, News release, October 5th
Olivella, P. and Vera-Hernandez, M. (2006), Testing for Adverse Selection into Private
Medical Insurance, The Institute for Fiscal Studies, WP06/02


Schwarze, R. and Wein, T. (2005), Is the market classification of risk always efficient?
Evidence from German third party motor insurance, CARR Discussion Paper No. 32
Simon, K.I. (2005), Adverse selection in health insurance markets? Evidence from state
small-group health insurance reforms, Journal of Public Economics, Vol 89(2005)
Society of Actuaries in Ireland (2004) The draft EU directive on equal insurance
premiums for men and women Briefing Statement on Unisex Premiums
Stiglitz, J. (2000), Economics of the Public sector, Norton
Swiss Re statistics
Thomas R.G. (2007) Some novel perspectives on risk classification, The Geneva Peppes,
Vol 32, pp105-132
Wolgast, M. (2005), Risk classification and public intervention in the German market: an
insurance industry perspective European Law and Economics Seminar,
Woolnough, K. (2004) Proposed European Directive on Equal Treatment Between Women
and Men in the Access to and Supply of Goods and Services. A short paper to explain
concepts, misconceptions and consequences, Swiss Re

Aims and scope: The Association of British Insurers (ABI) is the trade body representing
the UKs insurance industry. The ABI Research Paper series is used to publish the
research that the ABI carries out on behalf of its members in order to help inform the
insurance industry and contribute to public policy debate.

Series Editor: Rebecca Driver, Director of Research and Chief Economist, ABI

Author: This paper was written by Rebecca Driver, David ONeill and Athena Peppes,
from the ABI Research Department.

ABI Contacts: Copies of ABI Research Papers are available on the ABI website at:

Copies of ABI Research Papers may also be obtained from Research Department,
Association of British Insurers, 51 Gresham Street, London, EC2V 7HQ; Tel: +44 (0)20
7216 7390; Fax: +44 (0)20 7216 7449; email:

For Press queries, please contact the ABIs media team on Tel: +44 (0)20 7216 7394;

Disclaimer: The analysis presented in this paper is based on research undertaken by the
ABI and its contributors and does not necessarily reflect the views of the Association of
British Insurers, or its member companies. The research was carried out on behalf of the
ABI and its members and is not intended to be relied on by a wider audience. This paper
is being published in order to help inform the insurance industry and to contribute to
public policy debate and should be used only in that context. For that reason neither the
author nor the ABI shall have any liability for any loss or damage arising in connection
with the publication or use of this paper or the information in it. Neither the author nor
the ABI are authorised for the conduct of investment business (as defined in the Financial
Services and Markets Act 2000) and this paper is not intended as, and shall not
constitute, investment advice.

Copyright: Association of British Insurers, 2008. The information may only be used for
private or internal use (provided that fair attribution of copyright and authorship is
made). This paper shall not be used for commercial purposes (except for internal use,
provided that the copyright and any other proprietary notices are not removed).
Reproduction in whole or in part, or use for any commercial purpose (save as provided
above) requires the prior written approval of the Association of British Insurers and such
consent may be withheld or made subject to conditions.

ISBN 978 1-903193-41-9

For more information, contact:

Association of British Insurers

51 Gresham Street
London EC2V 7HQ
020 7600 3333