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

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  • Eling, Martin

    ()

  • Jia, Ruo

    ()

  • Yao, Yi

    ()

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.

Suggested Citation

  • Eling, Martin & Jia, Ruo & Yao, Yi, 2014. "Between-Group Adverse Selection: Evidence from Group Critical Illness Insurance," Working Papers on Finance 1403, University of St. Gallen, School of Finance, revised Oct 2014.
  • Handle: RePEc:usg:sfwpfi:2014:03
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1403.pdf
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    References listed on IDEAS

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    Keywords

    Adverse Selection; Information Asymmetry; Learning Over Time; Group Insurance; Critical Illness Insurance;

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