Moral Hazard and Advantageous Selection in Private Disability Insurance

Abstract

We analyze asymmetric information in private long-term disability insurance. Using the elimination period as a measure of coverage, we examine the correlation between risk and coverage. With a unique dataset including both group and individual insurance, we are able to disentangle moral hazard and selection in individual insurance by using group insurance as a control group.Our results provide evidence of moral hazard and advantageous selection in the individual private long-term disability insurance market. Furthermore, we can identify residential location as a source of advantageous selection. Thus, we provide guidelines for policymakers and insurers on the presence of asymmetric information in disability insurance and on future attempts to reduce it.