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Multiple dimensions of private information in life insurance markets

Author

Listed:
  • Xi Wu

    (Capital University of Economics and Business)

  • Li Gan

    (Texas A&M University)

Abstract

A growing amount of literature has shown the unavailability of a positive correlation between insurance coverage and ex post risk, even though the risk-related adverse selection is confirmed by other evidence. Such puzzles are suggested to be attributed to the coexistence of multi-dimensional private information. This paper develops a method to identify the risk-related private information in this case. To illustrate, we apply data from US life insurance market. Categorizing individuals’ heterogeneous insurance preferences into different groups and using joint maximum likelihood estimation of a mixture density model, we detect a positive correlation between individual mortality and insurance coverage within each group. This result is consistent with the conventional theory regarding the private information of adverse selection.

Suggested Citation

  • Xi Wu & Li Gan, 2023. "Multiple dimensions of private information in life insurance markets," Empirical Economics, Springer, vol. 65(5), pages 2145-2180, November.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:5:d:10.1007_s00181-023-02424-8
    DOI: 10.1007/s00181-023-02424-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Multiple dimensions of private information; Adverse Selection; Insurance markets; Mixture density model;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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