Who can see it coming? Demand‐side selection in long‐term care insurance related to decision‐making abilities

Timo Lambregts*, Erik Schut

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Abstract

Despite the growing demand for long-term care (LTC), the uptake of private LTC insurance (LTCI) is low and even declining in the United States. One reason is the complexity of LTCI decisions. Researchers have therefore suggested to support decision-making abilities. This paper shows, however, that such support would not unambiguously enhance functioning of the LTCI market. We analyze whether selection arises from two correlated but different decision-making abilities at old age, education and numeracy, and interactions thereof with private information. Using historical data from the Health and Retirement Survey we find that education generates adverse selection, which is only partially offset by advantageous selection due to numeracy. In addition, individuals with greater decision-making abilities make better LTCI choices, amplifying selection by education and numeracy. This points at a trade-off between decision simplicity and selection in insurance markets and suggests other steps are needed to enhance the performance of private LTCI markets.
Original languageEnglish
Pages (from-to)1
Number of pages23
JournalJournal of Risk and Insurance
Early online date11 Apr 2024
DOIs
Publication statusE-pub ahead of print - 11 Apr 2024

Bibliographical note

Publisher Copyright:
© 2024 The Authors. Journal of Risk and Insurance published by Wiley Periodicals LLC on behalf of American Risk and Insurance Association.

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