Estimation of Individual Insurance Demand Elasticities and Measuring the Welfare Impact of Premium Increases: An Application of Almost Ideal Demand System

Presence of moral hazard and adverse selection in insurance market increase premiums and lead to exit of high risk aversion individuals from the insurance market resulting in a loss of efficiency. Knowledge of insurance demand elasticities and measurement of the welfare effects of higher premiums, would help insurers adopt suitable remedial policies. This paper investigates this issue for individual insurances using AIDS during the period of 2006-2013. Marshallian and income elasticities indicate a weak relationship gross relationship between individual insurances. Furthermore, we find that life insurance is a luxury good and that supplementary care insurance and accident insurance are necessities. Hicks and Allen elasticities also suggest a weak net substitutability relationship between individual insurances studied. This relationship is stronger for life and accident insurances. According to E.V. and C.V. indices, the insurer, with the aim of reducing inefficiencies, can charge lump sum amounts instead of increasing premiums for low risk aversion individuals. If the insurer decides to increase premiums, it should compensate high risk aversion individuals by payments. Amounts transferred in the first case are much smaller than in the second case.