ASYMMETRIC INFORMATION IN LIFE INSURANCE: DIFFERENCE BETWEEN WHOLE LIFE AND TERM LIFE

Abstract

This paper provides empirical evidence consistent with the existence of adverse selection and moral hazard in the whole life and term life insurance market. We use life insurance companies' data to recognize adverse selection, moral hazard, and medical examination effects. Drawing on data from more than 1.3 million insurance policies in Japan, we find evidence that the mortality of the insured at policy inception is lower than that of the general public; with the selection of the insured via medical examination, we did not find adverse selection in new whole life and term life insurance risks. In the case of automatic renewal of term life policies where insurance companies set the price using the same regulated mortality table as that of optional renewal term life policies, the effectiveness of medical selection attenuates after approximately five years of the policy life, and the costs from adverse selection and the moral hazard from suicide begin to occur around the fifth year.