Private Information and Insurance Rejections


  • Nathaniel Hendren

    1. Dept. of Economics, Harvard University, Cambridge, MA 02138, U.S.A. and NBER;
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    • An earlier version of this paper is contained in the first chapter of my MIT graduate thesis. I am very grateful to Daron Acemoglu, Amy Finkelstein, Jon Gruber, and Rob Townsend for their guidance and support in writing this paper. I also thank Victor Chernozhukov, Sarah Miller, Whitney Newey, Ivan Werning, two anonymous referees, an extensive list of MIT graduate students, and seminar participants at University of California–Berkeley, Chicago Booth, University of Chicago, Columbia, Harvard, Microsoft Research New England, Northwestern, University of Pennsylvania, Princeton, and Stanford for helpful comments and suggestions. I would also like to thank several anonymous insurance underwriters for helpful assistance. Financial support from an NSF Graduate Research Fellowship and the NBER Health and Aging Fellowship, under the National Institute of Aging Grant T32-AG000186 is gratefully acknowledged.


Across a wide set of nongroup insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues that private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents' beliefs. I apply this approach to three nongroup markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance, and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest that private information prevents the existence of large segments of these three major insurance markets.