A test on adverse selection theory: The case of supplementary health insurance in Iran

This research aims to assess the existence of adverse selection phenomena (ASP) in supplementary health insurance market in Iran. ASP has always been one of the most important issues in insurance industry. Existence or non-existence of ASP can affect rate making in actuarial practice. Since actuaries consider positive loading to state when they face with or expect ASP. Thus, evidence of ASP is of vital importance in actuarial science. We try to show the correlation between the purchase of supplementary health insurance (SHI) and hospitalization (HOS). Our sample consists of 654 households. After controlling for some demographic variables such as sex, age, occupational status, marital status, the probit model is conducted to identify the relationship between SHI and HOS. The positive coefficient of correlation between SHI and HOS leads to the conclusion that ASP exists in Iranian supplementary health insurance market which suggests considering positive loading in pricing SHI products in Iran.