One-sided commitment in dynamic insurance contracts: Evidence from private health insurance in Germany

Abstract

This paper studies long-term private health insurance (PHI) in Germany. It describes the main actuarial principles of premium calculation and relates these to existing theory. In the German PHI policyholders do not commit to renewing their insurance contracts, but insurers commit to offering renewal at a premium rate that does not reflect revealed future information about the insured risk. We show that empirical results are consistent with theoretical predictions from one-sided commitment models: front-loading in premiums generates a lock-in of consumers, and more front-loading is generally associated with lower lapzation. Due to a lack of consumer commitment, dynamic information revelation about risk type implies that high-risk policyholders are more likely to retain their PHI contracts than are low-risk types.