Adverse vs. Advantageous Selection in Life Insurance Markets
35 Pages Posted: 30 Dec 2012
Date Written: December 28, 2012
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: Suggested Citation