'They Do Know What They are Doing... At Least Most of Them.' Asymmetric Information in the (Private) Disability Insurance

38 Pages Posted: 17 Dec 2014

See all articles by Martin Spindler

Martin Spindler

Max Planck Institute for Social Law and Social Policy; MEA

Date Written: May 13, 2013

Abstract

In this paper we analyze asymmetric information in the (private) disability insurance, which has not been analyzed before in the literature, but covers one of the most important risks faced by individuals in modern society, namely the loss of human capital. We show that there is asymmetric information, but the extent depends on the amount of coverage. Moreover, the option of choosing an annual adjustment of the insured sum has strong predictive power both for the occurrence of an accident and the chosen coverage, although it should be irrelevant from the point of theory. This result shows new ways to design contracts and variable selection for risk classification. In contrast to most previous studies, we also explicitly take into consideration unobserved heterogeneity by applying finite mixture models and so called ‘unused’ observables.

Keywords: Asymmetric Information, Disability Insurance, Accident Insurance, Unused Observables, Positive Correlation, Finite Mixture Model

JEL Classification: D82, G22, C12, C14

Suggested Citation

Spindler, Martin, 'They Do Know What They are Doing... At Least Most of Them.' Asymmetric Information in the (Private) Disability Insurance (May 13, 2013). Max Planck Institute for Social Law and Social Policy Discussion Paper No. 09-2012. Available at SSRN: https://ssrn.com/abstract=2539037 or http://dx.doi.org/10.2139/ssrn.2539037

Martin Spindler (Contact Author)

Max Planck Institute for Social Law and Social Policy ( email )

Amalienstraße 33
München, 80799
Germany

MEA ( email )

Amalienstrasse 33
Munich, 80799
Germany

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