IN THE NAME OF GOD

1. IN THE NAME OF GOD

3. Abstract About 60% of total premium of insurance industry is pertained to life policies in the world; while the life insurance total premium in Iran is less than 6% of total premium in insurance industry in 2008. (Sigma, No 3/2009) Among the reasons that discourage the life insurance industry is the problem of adverse selection. Adverse selection theory describes a situation where the information asymmetry between policy holders and insurers leads the market to a situation that the policy holders claim losses that are higher than the average rate of loss of population used by the insurers to set their premiums. We will examine the existence of adverse selection in Iranian Life Insurance Market. Following the assessment of the effect of risk aversion on Life Insurance demand, we discuss the effect of psychological factors as well as economic factors such as the education, occupation, sex, age, income, wealth of household and other factors on Iranian life insurance demand.

4. Adverse Selection ( From early 90th) Problem of Adverse Selection: Customers know more about their risk level than the insurers and efficiently use their information against the insurers. The Adverse selection will occur in Life Insurance Market , when the high risk individuals demand more of life insurance services than the low risk individuals (in other words, individual with higher level of risk aversion). a. Assumptions: The difference in exposure to risk. Positive correlation between self-perceived risk level and real risk level. No relationship between the level of risk aversion and riskiness. Customers know more about their riskiness than the insurers and efficiently use their information against the insurers. b. Implications: 1) Insufficient Provision of the products 2) Contradiction with real world

5. Advantageous Selection ( From early 90th) Advantageous selection exists in Life Insurance Market when the individuals with high level of risk aversion ( in other words, low risk individuals) demand more of life insurance services than the individuals with high risk individuals. a. Assumptions: The difference in exposure to risk. Negative correlation between the level of risk aversion and riskiness. Effectiveness of Precautionary Efforts. b. Implications: Sufficient Provision of the products No Contradiction with real world

6. 2. Purposes: 1. Determining the degree of correlation between Risk Aversion and the demand for life insurance. 2- Examining the existence of adverse selection or advantageous selection in Iranian life Insurance Market.

7. 3. The Model: We will apply Logistic Model to examine the existence of adverse selection in Life Insurance Market. Data will be collected via questionnaire. Since there are qualitative data (sex, marital status, occupation, education, and etc.), The Logistic Model will be an appropriate method for estimating our parameters (ßi): Yi*=Logit[p(xi)] = log (pi/1-pi) = a + ßi Xi (1) i=1,2, …. , n

8. However, it can be linear by the logarithmic transformation; We obtain the equation (3);

9. Maximum Likelihood Analysis: Since our data follow a binomial distribution , we apply maximum likelihood analysis using the binomial likelihood with mean value given by an appropriate function of predictors. It can be written as: Ln(p(xi)) = a + Si=1,…,n { yi log(pi/1-pi) + ni log(1-pi)} We also use the statistical tests; Likelihood-ratio and Wald tests for determining the effectiveness specifically.

10. 4. Results Summary statistics and frequency distributions of the variables are presented in table 1. Random sampling method is applied to individuals data in Tehran through the questionnaires filled out by about 250 individuals. Usable filled-out questionnaires are 122. Out of 122 respondents , about 79.7% (98 in number) of individuals purchased the policy of life insurance and 20.3% (24) of them were left uninsured.

11. Table 1-Frequency Distribution of Characteristics of Respondents insureds

12. Table 2. Model Fitting Information

13. Table 3. Likelihood Ratio Tests

14. Table4. Variables in the Equation

15. Conclusions: Results show that consumers who are willing to buy life insurance are more risk averse and have a lower level of risk level and the demand for life insurance have positive correlation with the risk aversion. since the individuals with high level of Risk Aversion( but with low level of risk) demand more for life insurance rather than the individuals with the high level of risk, we conclude that adverse selection doesn’t exist in Iranian Life Insurance Market. The life insurance market faces with advantageous selection situation rather than adverse selection in Iran.

16. Thank You Very Much for Your Attention