Between‐Group Adverse Selection: Evidence from Group Critical Illness Insurance
39 Pages Posted: 15 May 2017
Date Written: June 2017
This article demonstrates the presence of adverse selection in the group insurance market. Conventional wisdom suggests that group insurance mitigates adverse selection because it minimizes individual choice. We complement this conventional wisdom by analyzing a group insurance scenario in which individual choice is excluded, and we find that group insurance alone is not effective enough to eliminate adverse selection; that is, between‐group adverse selection exists. Between‐group adverse selection, however, disappears over time if the group renews with the same insurer for a certain period. Our results thus indicate that experience rating and underwriting based on information that insurers learn over time are important in addressing adverse selection.
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