Private Information and Insurance Rejections

Area of Science:

• Economics
• Insurance Markets
• Behavioral Economics

Background:

• In non-group insurance markets, applicants are often rejected based on observable high-risk characteristics.
• The role of private information in these rejections has not been fully explored.

Purpose of the Study:

• To develop and test a theoretical model explaining how private information can lead to market rejections.
• To empirically investigate the presence and impact of private information in insurance markets.

Main Methods:

• Derived a theoretical no-trade result to explain rejections due to private information.
• Developed an empirical methodology using subjective probability elicitations to measure agents' beliefs.
• Applied the methodology to long-term care, disability, and life insurance markets.

Main Results:

• Found significant private information among rejected applicants across all three markets.
• Observed higher levels of private information in rejected individuals compared to those who can purchase insurance.
• Demonstrated that the extent of private information is sufficient to explain the absence of trade for rejected individuals.

Conclusions:

• Private information held by applicants is a key driver of rejections in non-group insurance markets.
• The findings suggest that private information significantly hinders the functioning of major insurance markets, leading to market exclusion.