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IS THERE ADVERSE SELECTION IN LIFE INSURANCE MARKETS?
Author(s) -
Hedengren David,
Stratmann Thomas
Publication year - 2016
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12212
Subject(s) - adverse selection , life insurance , actuarial science , selection (genetic algorithm) , economics , group insurance , set (abstract data type) , insurance policy , general insurance , income protection insurance , computer science , artificial intelligence , programming language
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 D8, G1, I1)