A Study on Advantageous Selection in Car Collision Insuranc and its Impact on Rate-Making in Iranian Insurance Industry

The conventional theory of adverse selection is not supported by most of the empirical works. These studies conclude that low-risk individuals demand more insurance services than high-risks. They refer to this situation as advantageous selection theory. This theory states that loss ratio of insureds may be lower than the population loss ratio while the conventional theory of adverse selection claims the reverse. under the assumptions of theory of advantageous selection, insurers end up with relatively low-risk individuals and the selection effect will be propitious to insurers as more risk-averse low-risk individuals are not only willing to pay more for precautionary efforts but also are more inclined to insure. This paper examines the presence of advantageous selection in the Iranian Car collision insurance market and concludes that there exists considerable advantageous selection behavior in this market.