Adverse vs. Advantageous Selection in Life Insurance Markets

35 Pages Posted: 30 Dec 2012

See all articles by David Hedengren

David Hedengren

George Mason University

Thomas Stratmann

George Mason University - Buchanan Center Political Economy; George Mason University - Mercatus Center; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 28, 2012

Abstract

Adverse selection theory predicts that people with a high death risk are more likely to purchase life insurance. The advantageous selection hypothesis predicts the opposite. Using a unique dataset merging administrative and survey records we find support for the advantageous selection hypothesis. We exploit variation in risk aversion among consumers and between pricing structures in individual and group life insurance markets to study and identify the relative strength of advantageous and adverse selection forces. We find that the overall negative relationship between risk and coverage is likely due to advantageous selection swamping adverse selection forces.

Keywords: adverse selection, advantageous selection, propitious selection, life insurance

JEL Classification: D8, I1

Suggested Citation

Hedengren, David and Stratmann, Thomas, Adverse vs. Advantageous Selection in Life Insurance Markets (December 28, 2012). Available at SSRN: https://ssrn.com/abstract=2194376 or http://dx.doi.org/10.2139/ssrn.2194376

David Hedengren (Contact Author)

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States

Thomas Stratmann

George Mason University - Buchanan Center Political Economy ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://www.mercatus.org/scholars/thomas-stratmann

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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