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Is There Adverse Selection in Life Insurance Markets?

14 Pages Posted: 27 Nov 2015  

David Hedengren

George Mason University

Thomas Stratmann

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

Date Written: January 2016

Abstract

Adverse selection theory predicts people with a high risk of death are more likely to own life insurance. Using a unique data set merging administrative and survey records, we test this theory and find the opposite: people with high death risk are less likely to own life insurance. We postulate advantageous selection and price discrimination swamp adverse selection in individual life insurance markets. To determine which effect is more powerful, we analyze group life insurance markets, where insurance companies cannot price discriminate as well as in individual markets. Our data suggest that price discrimination has a stronger effect than advantageous selection.

JEL Classification: D8, G1, I1

Suggested Citation

Hedengren, David and Stratmann, Thomas, Is There Adverse Selection in Life Insurance Markets? (January 2016). Economic Inquiry, Vol. 54, Issue 1, pp. 450-463, 2016. Available at SSRN: https://ssrn.com/abstract=2695891 or http://dx.doi.org/10.1111/ecin.12212

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)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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