Actuarial Theory of Insurance Contract Design Under Asymmetric Information in Emerging Markets

This study develops an actuarial theory of insurance contract design under asymmetric information conditions specific to emerging market institutional contexts, with empirical application to Nigerian life and health insurance markets. Contract theory literature on insurance moral hazard and adverse selection is well-established in theoretical economics but has rarely been extended to explicitly incorporate the actuarial dimensions of risk classification, premium differentiation, and reserve implications, nor the distinctive institutional features of emerging markets including weak enforcement, informal information networks, and limited credit history data. This study develops a principal-agent model of the insurer-policyholder relationship that incorporates actuarial cost functions, heterogeneous risk types drawn from Nigerian demographic data, and emerging market institutional constraints on risk screening. The model derives optimal contract menus and screening mechanisms under different assumptions about information quality and enforcement. Comparative statics characterize how optimal contract design changes with institutional quality, risk heterogeneity, and actuarial data richness. Empirical tests using Nigerian life and health insurance pricing data and claims experience assess the model's predictive validity. Findings support the model's prediction that insurers in markets with weaker risk screening capacity converge to pooling equilibria with higher average premiums and lower coverage, consistent with the low-penetration-high-price pattern observed in Nigerian insurance markets. The study contributes an original emerging market actuarial contract theory and recommends investment in risk classification infrastructure as a first-order policy priority.

Keywords: insurance contract theory, asymmetric information, actuarial pricing, adverse selection, emerging markets.