IS THERE ADVERSE SELECTION IN LIFE INSURANCE MARKETS?

David Hedengren and Thomas Stratmann

Economic Inquiry, 2016, vol. 54, issue 1, 450-463

Abstract: type="main" xml:id="ecin12212-abs-0001"> Adverse selection theory predicts people with a high risk of death are more likely to own life insurance. Using a unique data set merging administrative and survey records, we test this theory and find the opposite: people with high death risk are less likely to own life insurance. We postulate advantageous selection and price discrimination swamp adverse selection in individual life insurance markets. To determine which effect is more powerful, we analyze group life insurance markets, where insurance companies cannot price discriminate as well as in individual markets. Our data suggest that price discrimination has a stronger effect than advantageous selection. (JEL D8, G1, I1)

Date: 2016
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