Moral Hazard and Advantageous Selection in Private Disability Insurance

We analyse asymmetric information in private long-term disability insurance. Using the elimination period as a measure of coverage, we examine the correlation between risk and coverage. Our unique data set includes both group and individual insurance. We are thus able to disentangle moral hazard and selection in individual insurance by controlling for moral hazard using group insurance. Our results provide evidence of moral hazard and advantageous selection in the individual private long-term disability insurance market. Thus, we provide guidelines for policymakers and insurers on the presence of asymmetric information in disability insurance and on future attempts to reduce it.