The American Risk and Insurance Association presents the Robert I. Mehr Award each year for the paper published ten years ago in The Journal of Risk and Insurance that has best stood the test of time. The evaluation of the articles is made by the editorial board of JRI.
The recipients of the 2020 Mehr Award are Alma Cohen and Peter Siegelman for “Testing for Adverse Selection in Insurance Markets.”
This article reviews and evaluates the empirical literature on adverse selection in insurance markets. We focus on empirical work that seeks to test the basic coverage–risk prediction of adverse selection theory—that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, we argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. We discuss various reasons why a coverage–risk correlation may not be found in some pools of insurance policies. The presence of a coverage–risk correlation can be explained either by moral hazard or adverse selection, and we discuss methods for distinguishing between them. Finally, we review the evidence on learning by policyholders and insurers.