Summary:
Insurers and insureds having different information advantages, the insurance market is not only an essential source of adverse selection theory, but also an important place to verify the theory. Adverse selection in the market affects the profit of the life insurance company as well as the existence of the market, it is, therefore, of great practical significance to judge whether there is such selection in the life insurance market, which directly determines the behavior of the regulator, the insurer and the insured. If consumers are free to choose the security, the higher the security, the higher the price of insurance products, then the risk level of consumers is positively related to the security they choose. This is the positive correlation theory to verify the existence of adverse selection. Robust as it is, it does not rely on the setting of functional forms, nor does it require special assumptions about preferences, technology, and equilibrium. In this paper, CHARLS data and positive correlation theory are used to test the adverse selection in China's term and whole life insurance market. The risk of death is measured in accordance with the respondents' probability of living to a certain age and their self-rated health, then whether there is a correlation between the risk of death and the security is obtained. The combination of long-term and short-term indicators overcomes the above-mentioned shortcomings of using only mortality indicators. Of course, this correlation may also be caused by the omission of some unobservable variables. To eliminate the impact of missing variables, this paper, in reference to the existing literature, controls the consumer's personal and income characteristics, altruistic motivation, risk attitude and family financial indicators. Not only does these data test the correlation between risk and security, but the robustness of this correlation. The final empirical results indicate there is no adverse selection in China's life insurance market due to altruistic motives. This article for the first time uses CHARLS data to study the problem of adverse selection in China's life insurance market. There are three innovations in testing methods and research ideas: First, unlike the existing literature that uses only mortality indicators, we use both the long and the short-term indicators to measure the risk of death. Therefore, the conclusions obtained are more robust. Second, having controlled altruistic motivations, risk attitudes, and household financial indicators, we analyze the adverse selection of the life insurance market from the perspective of generalized and intensive margins, divide the sample into term life insurance and whole life insurance for regression, making the model conclusion more credible. Besides, though the existing literature believes that altruistic motivation and risk attitude are the two reasons leading to the absence of adverse selection in the life insurance market, empirical evidence cannot be given yet. This paper, with the bivariate Probit model, finds out that for consumers of China's term life insurance and whole life insurance altruistic motivation affects the correlation between death risk and security. The core conclusion of this paper is of great significance to the healthy development of China's life insurance industry. In the first place, product innovation is one of the important ways to ensure no adverse selection in China's life insurance market. Moreover, Chinese consumers purchase term life insurance or whole life insurance products out of altruistic motives. In order to attract these people, insurers should appropriately reduce the price of life insurance products. In this article, the adverse selection of the life insurance market is tested based on CHARLS data and the conclusion that there is no adverse selection in the life insurance market is obtained. Yet, there are still many follow-up issues to be further explored. For example, this paper has listed four evidences to prove no adverse selection in life insurance markets, but due to data limitations, only two empirical evidences are given. Therefore, using macro and micro data of China to provide empirical evidence for other reasons is our next research direction.
范庆祝, 孙祁祥. 中国寿险市场存在逆向选择吗?——来自CHARLS数据的经验证据[J]. 金融研究, 2020, 482(8): 112-129.
FAN Qingzhu, SUN Qixiang. Is There Adverse Selection in China's Life Insurance Market? Empirical Evidence from CHARLS Data. Journal of Financial Research, 2020, 482(8): 112-129.
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