Testing Adverse Selection With Two‐Dimensional Information: Evidence From the Singapore Auto Insurance Market

This article examines adverse selection in insurance markets with two‐dimensional information: policyholders’ riskiness and degree of risk aversion. We build a theoretical model to make equilibrium predictions on competitive insurance screening. We study several variations on the pattern of information asymmetry. The outcomes range from full separation to partial separation, and complete pooling of risk types. Next, we propose a copula approach to jointly examine policyholders’ coverage choice and accident occurrence in the Singapore automobile insurance market. Furthermore, we invoke the theory to identify subgroups of policyholders for whom one may expect the risk–coverage correlation and adverse selection to arise.