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Is There Adverse Selection In Life Insurance Markets?

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  • David Hedengren
  • Thomas Stratmann

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)

Suggested Citation

  • David Hedengren & Thomas Stratmann, 2016. "Is There Adverse Selection In Life Insurance Markets?," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 450-463, January.
    • Handle: RePEc:bla:ecinqu:v:54:y:2016:i:1:p:450-463
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    References listed on IDEAS

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    Cited by:

    1. Timothy F. Harris & Aaron Yelowitz & Charles Courtemanche, 2021. "Did COVID‐19 change life insurance offerings?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(4), pages 831-861, December.
    2. Ropponen, Olli & Kuusi, Tero & Valkonen, Tarmo, 2022. "Mind the Gap – Assessing the Size and Determinants of the Life Insurance Gap," ETLA Working Papers 96, The Research Institute of the Finnish Economy.
    3. Bauchet, Jonathan & Chakravarty, Sugato & Hunter, Brian, 2018. "Separating the wheat from the chaff: Signaling in microfinance loans," World Development, Elsevier, vol. 106(C), pages 40-50.
    4. Timothy F. Harris & Aaron Yelowitz, 2017. "Nudging Life Insurance Holdings In The Workplace," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 951-981, April.
    5. Akbar Marvasti & Sami Dakhlia, 2024. "Moral hazard and selection bias in insurance markets: Evidence from commercial fisheries," Southern Economic Journal, John Wiley & Sons, vol. 90(3), pages 682-700, January.
    6. Timothy F. Harris & Aaron Yelowitz & Jeffery Talbert & Alison Davis, 2023. "Adverse selection in the group life insurance market," Economic Inquiry, Western Economic Association International, vol. 61(4), pages 911-941, October.
    7. Srbinoski Bojan & Strozzi Fernanda & Poposki Klime & Born Patricia H., 2020. "Trends in Life Insurance Demand and Lapse Literature," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 14(2), pages 1-46, July.
    8. Timothy F. Harris & Aaron Yelowitz, 2018. "Life Insurance Holdings And Well‐Being Of Surviving Spouses," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 526-538, July.
    9. Denis Charles & Magali Dumontet & Johanna Etner & Meglena Jeleva, 2024. "Behavioral drivers of individuals’ Term Life Insurance Demand: evidence from a Discrete Choice Experiment," Working Papers hal-04649103, HAL.
    10. Denis Charles & Magali Dumontet & Johanna Etner & Meglena Jeleva, 2026. "Behavioral drivers of individuals’ term life insurance demand: evidence from a discrete choice experiment," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 51(2), pages 239-263, April.
    11. Harris, Timothy F. & Yelowitz, Aaron & Talbert, Jeffery & Davis, Alison, 2022. "Adverse Selection in the Group Life Insurance Market," IZA Discussion Papers 14985, IZA Network @ LISER.

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets
    • I1 - Health, Education, and Welfare - - Health

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