Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper explores private information as a potential cause. To do so, we develop and test a model in which agents have private information about their risk. We derive a new no-trade result that can theoretically explain how private information could cause rejections. We use the no-trade condition to generate measures of the barrier to trade private information imposes. We develop a new empirical methodology to estimate these measures that uses subjective probability elicitations as noisy measures of agents’ beliefs. We apply our approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings we ﬁnd larger barriers to trade imposed by private information for those who would be rejected relative to those who are served by the market. For those who would be rejected, private information imposes a barrier to trade equivalent to an implicit tax on insurance premiums of roughly 65-75% in long-term care, 90-130% in disability, and 65-130% in life insurance.His intuitive summary of the results: from the standpoint of an insurance company, there's one way to be healthy, but many (unobservable) ways to be sick. Based on his presentation and a quick scan of the paper, his paper has a lot of good stuff in it.
Thursday, February 16, 2012
On my reading list: Private Information and Insurance Rejections
I recently attended a job market seminar by Nathaniel Hendren. Here is the abstract to the paper he presented:
Posted by Tony Cookson at 6:30 PM