Heterogeneous selection in the market for private supplemental dental insurance : evidence from Germany

This paper analyzes the German market for supplemental dental insurance (SuppDI) to identify selection behavior based on individuals’ private information. The rather limited underwriting by German private health insurers makes this market especially prone to selection effects. Although the standard positive correlation test does not indicate asymmetric information in this market, we conjecture that this outcome may result from sample heterogeneity when adverse and advantageous selection occur simultaneously and offset each other. Examining a large set of potential sources of selection, we find that the individuals’ preference for insurance, which is related to risk preferences, contributes to an advantageous selection in this market. Our results suggest that even in the absence of a positive correlation between risk and insurance coverage, the German SuppDI market suffers from information asymmetry caused by multidimensional private information