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Price Elasticity of Demand for Term Life Insurance and Adverse Selection

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Listed:
  • Mark V. Pauly
  • Kate H. Withers
  • Krupa Subramanian-Viswana
  • Jean Lemaire
  • John C. Hershey

Abstract

This paper provides an empirical estimate of price' and risk' elasticities of demand for term life insurance for those who purchase some insurance. It finds that the elasticity with respect to changes in premiums is generally higher than the elasticity with respect to changes in risk. It also finds that the elasticity, in the range of -0.3 to -0.5, is sufficiently low that adverse selection in term life insurance is unlikely to lead to a death spiral and may not even lead to measured effects of adverse selection on total purchases.

Suggested Citation

  • Mark V. Pauly & Kate H. Withers & Krupa Subramanian-Viswana & Jean Lemaire & John C. Hershey, 2003. "Price Elasticity of Demand for Term Life Insurance and Adverse Selection," NBER Working Papers 9925, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9925
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. R. Guy Thomas, 2008. "Loss Coverage as a Public Policy Objective for Risk Classification Schemes," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 997-1018, December.
    2. Radoslaw Paluszynski & Pei Cheng Yu, 2023. "Commitment versus Flexibility and Sticky Prices: Evidence from Life Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 99-122, July.
    3. Maureen Durnin & Michael Hoy & Michael Ruse, 2012. "Genetic Testing and Insurance: The Complexity of Adverse Selection," Working Papers 1208, University of Guelph, Department of Economics and Finance.
    4. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    5. Oster, Emily & Shoulson, Ira & Quaid, Kimberly & Dorsey, E. Ray, 2010. "Genetic adverse selection: Evidence from long-term care insurance and Huntington disease," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1041-1050, December.
    6. Michiel Bijlsma & Cora Zonderland & Machiel van Dijk & Marc Pomp, 2005. "Competition in markets for life insurance," CPB Document 96, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Michael Hoy & Afrasiab Mirza & Asha Sadanand, 2021. "Guaranteed renewable life insurance under demand uncertainty," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(1), pages 131-159, March.
    8. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84, March.
    9. Michael Hoy & Michael Ruse, 2005. "Regulating Genetic Information in Insurance Markets," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 8(2), pages 211-237, September.
    10. Timothy F. Harris & Aaron Yelowitz, 2017. "Nudging Life Insurance Holdings In The Workplace," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 951-981, April.
    11. Chatterjee, Indradeb & Hao, MingJie & Tapadar, Pradip & Thomas, R. Guy, 2024. "Can price collars increase insurance loss coverage?," Insurance: Mathematics and Economics, Elsevier, vol. 116(C), pages 74-94.
    12. Michael Hoy & Julia Witt, 2007. "Welfare Effects of Banning Genetic Information in the Life Insurance Market: The Case of BRCA1/2 Genes," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(3), pages 523-546, September.
    13. Krupa S. Viswanathan & Jean Lemaire & Kate Withers & Katrina Armstrong & Agnieszka Baumritter & John C. Hershey & Mark V. Pauly & David A. Asch, 2007. "Adverse Selection in Term Life Insurance Purchasing due to the BRCA1/2 Genetic Test and Elastic Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(1), pages 65-86, March.
    14. Song, In Jung & Park, Heejung & Park, Narang & Heo, Wookjae, 2019. "The effect of experiencing a death on life insurance ownership," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 170-176.
    15. Denis Charles & Magali Dumontet & Meglena Jeleva & Johanna Etner, 2024. "Behavioral drivers of individuals’ Term Life Insurance Demand: evidence from a Discrete Choice Experiment," EconomiX Working Papers 2024-23, University of Paris Nanterre, EconomiX.
    16. Deborah Wilson, 2005. "Acquisition and disclosure of genetic information under alternative policy regimes," The Centre for Market and Public Organisation 05/118, The Centre for Market and Public Organisation, University of Bristol, UK.
    17. Hao, MingJie & Macdonald, Angus S. & Tapadar, Pradip & Thomas, R. Guy, 2018. "Insurance loss coverage and demand elasticities," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 15-25.
    18. Grönqvist, Erik, 2004. "Does Adverse Selection Matter? Evidence from a Natural Experiment," SSE/EFI Working Paper Series in Economics and Finance 575, Stockholm School of Economics.
    19. Michiel Bijlsma & Machiel van Dijk & Marc Pomp & Cora Zonderland, 2005. "Competition in markets for life insurance," CPB Document 96.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    20. Vékás, Péter & Banyár, József, 2016. "A pénzügyi termékek ára [The price of financial products]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 380-406.
    21. Radoslaw Paluszynski & Pei Cheng, 2019. "Pay What Your Dad Paid: Commitment and Price Rigidity in the Market for Life Insurance," Discussion Papers 2019-02, School of Economics, The University of New South Wales.
    22. R. Guy Thomas, 2018. "Why Insurers Are Wrong about Adverse Selection," Laws, MDPI, vol. 7(2), pages 1-8, April.
    23. Chatterjee, Indradeb & Macdonald, Angus S. & Tapadar, Pradip & Thomas, R. Guy, 2021. "When is utilitarian welfare higher under insurance risk pooling?," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 289-301.
    24. Michael Hoy & Michael Ruse, 2008. "“No Solution to This Dilemma Exists”: Discrimination, Insurance, and the Human Genome Project," Working Papers 0808, University of Guelph, Department of Economics and Finance.

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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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