Private Information and Insurance Rejections

56 Pages Posted: 10 Aug 2012 Last revised: 16 Jun 2023

See all articles by Nathaniel Hendren

Nathaniel Hendren

Harvard University - Department of Economics

Date Written: August 2012

Abstract

Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance; and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest private information prevents the existence of large segments of these three major insurance markets.

Suggested Citation

Hendren, Nathaniel, Private Information and Insurance Rejections (August 2012). NBER Working Paper No. w18282, Available at SSRN: https://ssrn.com/abstract=2127547

Nathaniel Hendren (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

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