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Price Elasticity of Demand for Term Life Insurance and Adverse Selection

  • Mark V. Pauly
  • Kate H. Withers
  • Krupa Subramanian-Viswana
  • Jean Lemaire
  • John C. Hershey

This paper provides an empirical estimate of price' and risk' elasticities of demand for term life insurance for those who purchase some insurance. It finds that the elasticity with respect to changes in premiums is generally higher than the elasticity with respect to changes in risk. It also finds that the elasticity, in the range of -0.3 to -0.5, is sufficiently low that adverse selection in term life insurance is unlikely to lead to a death spiral and may not even lead to measured effects of adverse selection on total purchases.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9925.

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Date of creation: Aug 2003
Date of revision:
Handle: RePEc:nbr:nberwo:9925
Note: HE
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  1. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  2. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
  3. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  4. Babbel, David F, 1985. " The Price Elasticity of Demand for Whole Life Insurance," Journal of Finance, American Finance Association, vol. 40(1), pages 225-39, March.
  5. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
  6. Rogers, Richard G. & Powell-Griner, Eve, 1991. "Life expectancies of cigarette smokers and nonsmokers in the United States," Social Science & Medicine, Elsevier, vol. 32(10), pages 1151-1159, January.
  7. Hausman, Jerry A & Wise, David A, 1980. "Discontinuous Budget Constraints and Estimation: The Demand for Housing," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 75-96, January.
  8. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
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