Adverse selection in the group life insurance market

Abstract

AbstractThe employer‐sponsored life insurance (ESLI) market is susceptible to adverse selection due to community‐rated premiums, guaranteed issue coverage, and the existence of an individual market. Using payroll and healthcare claims data from a large university, we find that employees with worse health are more likely to elect coverage causing adverse selection in supplemental ESLI. Nonetheless, we find employees typically do not increase coverage following a severe illness even when they can without providing evidence of insurability. Furthermore, demand estimation shows employees are not price‐sensitive and estimated increases in premiums from adverse selection are unlikely to cause significant welfare loss.