Workers' moral hazard and private insurer effort in disability insurance

Abstract

While it is well known that supplementary private Disability Insurance (DI) has the potential to increase workers' moral hazard, the extra coverage may also increase incentives for private insurers to reduce caseloads by means of prevention and reintegration activities. With unique administrative data on DI contracts of firms in the Netherlands, this paper aims to disentangle these worker and insurer responses to increased coverage. Supplementary insurance increases the insurers' incentive to lower disability risks, but in our setting it also creates an incentive for the insurers to facilitate partial work resumption of disabled workers who have earnings capacity. Using firm- and time-fixed effects models on the absence and employment rates, we find that insurer effort counteracts workers' moral hazard.