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Capping Risk Adjustment?


Eugster, Patrick; Sennhauser, Michèle; Zweifel, Peter (2009). Capping Risk Adjustment? Working paper series / Socioeconomic Institute No. 915, University of Zurich.

Abstract

When premiums are community-rated, risk adjustment (RA) serves to mitigate competitive insurers’ incentive to select favorable risks. However, unless fully prospective, it also undermines their incentives for efficiency. By capping its volume, one may try to counteract this tendency, exposing insurers to some financial risk. This in term runs counter the quest to refine the RA formula, which would increase RA volume. Specifically, the adjuster, ”Hospitalization or living in a nursing home during the previous year” will be added in Switzerland starting 2012. This paper investigates how to minimize the opportunity cost of capping RA in terms of increased incentives for risk selection.

When premiums are community-rated, risk adjustment (RA) serves to mitigate competitive insurers’ incentive to select favorable risks. However, unless fully prospective, it also undermines their incentives for efficiency. By capping its volume, one may try to counteract this tendency, exposing insurers to some financial risk. This in term runs counter the quest to refine the RA formula, which would increase RA volume. Specifically, the adjuster, ”Hospitalization or living in a nursing home during the previous year” will be added in Switzerland starting 2012. This paper investigates how to minimize the opportunity cost of capping RA in terms of increased incentives for risk selection.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:I18, L51, H51
Language:English
Date:September 2009
Deposited On:29 Nov 2011 20:09
Last Modified:05 Apr 2016 15:10
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: http://doi.org/10.5167/uzh-51924

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