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Between-Group Adverse Selection: Evidence from Group Critical Illness Insurance

Martin Eling, Ruo Jia () and Yi Yao ()

No 1403, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: This paper demonstrates the presence of adverse selection in the group insurance market for policies that allow no individual choice. As a “conventional wisdom,” group insurance mitigates adverse selection, since individual choice is minimized and group losses have less variability than individual losses. We complement this “conventional wisdom” by analyzing a group insurance scenario in which individual choice is excluded, and find that there is still adverse selection at the level of group, i.e. between-group adverse selection. Between-group adverse selection, however, disappears over time if the group renews with the same insurer for certain periods. Our results thus indicate that addressing adverse selection via group insurance is not necessarily effective enough to mitigate adverse selection, but that experience rating and underwriting based on the information that insurers learn over time are important.

Keywords: Adverse Selection; Information Asymmetry; Learning Over Time; Group Insurance; Critical Illness Insurance (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-02, Revised 2014-10
New Economics Papers: this item is included in nep-cdm, nep-cta, nep-hea and nep-ias
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Handle: RePEc:usg:sfwpfi:2014:03