An Experimental Study On Adverse Selection And Moral Hazard

This paper examines adverse selection and moral hazard in the life insurance market. Using actual company data in Japan, we find evidence that life insurance companies use medical examination techniques to control problems of adverse selection in the lines of new whole life and term life insurance. After an elapse of a few years, however, the mortality index is clearly changing for the worse in our observation. Although it may depend upon disappearance of the effect of medical selection, it would be noteworthy that the mortality index in some case becomes even worse than that of people without medical examination. We conclude by saying that moral hazard, in some case, adverse selection could exert an influence on an aggravation of the mortality index.