Lemons or Cherries? Asymmetric information in the German private long-term care insurance market

Abstract

This study provides evidence of the presence of asymmetric information in the German long-term care (LTC) insurance market. While certain private information - individuals' pessimism level and preference for insurance - contributes to advantageous selection, the major source of adverse selection - individuals' self-assessed high LTC risk - switches the final correlation between insurance and risk to one that is significantly positive. In addition, the study reveals that although individuals' self-assessment of poor health predicts their future care needs very well, such assessments are not necessarily reflected in insurance demand. The results from this study could assist insurers in better understanding and managing LTC risk.