Adverse Selection in the Group Life Insurance Market

Timothy F. Harris (), Aaron Yelowitz, Jeffery Talbert () and Alison Davis ()
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Timothy F. Harris: Illinois State University
Jeffery Talbert: University of Kentucky
Alison Davis: University of Kentucky

No 14985, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The employer-sponsored life insurance (ESLI) market is particularly susceptible to adverse selection due to community-rated premiums, guaranteed issue coverage, and the existence of a well-functioning individual market as a substitute. Using administrative payroll and healthcare claims data from a large university, we find evidence of adverse selection in the supplemental ESLI market. Employees in worse health, as measured by the Charlson's Comorbidity Index, are more likely to elect coverage than those in better health. Nonetheless, we also find that employees typically do not increase coverage following diagnosis of a severe illness even when they can without providing evidence of insurability. Furthermore, demand estimation shows that employees are not price-sensitive and that the estimated increases in premiums due to adverse selection are unlikely to cause significant welfare loss.

Keywords: employer-sponsored life insurance; adverse selection (search for similar items in EconPapers)
JEL-codes: D82 G22 J33 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-01
New Economics Papers: this item is included in nep-hea, nep-ias and nep-lma
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Published - published in: Economic Inquiry, 2023, 61 (5), 911-941

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