Adverse selection risk in Iran's health insurance industry

Nobahar, E.; Pourebadollahan Covich, M.; Bahlouli, R.

doi:10.22056/ijir.2020.03.03

Document Type : Original Research Paper

Authors

Department of Economic Development and Planning, Faculty of Economics and Management, Tabriz University, East Azarbaijan, Iran

https://doi.org/10.22056/ijir.2020.03.03

Abstract

Objective: The asymmetry of information between insurance companies and the insured and the resulting problems is one of the most important issues in the insurance industry, which can severely affect the profits of insurance companies and expose them to significant risks. Meanwhile, the risk of selection bias is one of the most important problems caused by information asymmetry. In this regard, the present study investigates the risk of selection bias in Iran's medical insurance industry.
Methodology: In this study, the data extracted from the cost and income statistics plan of urban and rural households in Iran in 2015 was used. To investigate the existence of risk of selection bias in Iran's medical insurance industry, first the hidden health variable of each household has been calculated by estimating the demand function of health and medical services using the nonlinear least squares (NLS) method. Then, using the two-sample Kolmogorov-Smirnov test as well as comparing the hidden health distribution of insured and uninsured households, the presence of selection bias risk has been tested.
Findings: The results of the two-sample Kolmogorov-Smirnov test showed that the distribution of the latent health variable in the two groups of insured and uninsured households is not equal. In other words, there is a significant difference in the health status of insured and uninsured households. Also, the comparison of the distribution of hidden health variable shows that the level of hidden health of insured households is lower than that of uninsured ones. Therefore, the existence of biased risk in Iran's medical insurance industry was confirmed. Also, the risk aversion parameter of households for consumption of healthcare services (γ_2) was equal to 0.1109 and for consumption of other goods (〖γ〗_1) was equal to 0.0226.
Conclusion: The results of this research indicate the existence of biased risk in Iran's medical insurance industry. In addition, people are more risk averse in consuming healthcare services than in consuming other goods and services. Therefore, according to the analysis framework and its results, solutions have been presented to minimize the risk of bias in health insurance companies.

Keywords

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Iranian Journal of Insurance Research

Adverse selection risk in Iran's health insurance industry

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Volume 9, Issue 3 - Serial Number 33
July 2020
Pages 280-293

Adverse selection risk in Iran's health insurance industry

References

References

Letters to Editor

Send comment about this article

Volume 9, Issue 3 - Serial Number 33July 2020Pages 280-293

Volume 9, Issue 3 - Serial Number 33
July 2020
Pages 280-293