Representation, medical examination, and the effectiveness of underwriting: Evidence from a life and health insurance company

Abstract This study examines whether underwriting methods—representation, medical examination, extra premiums, and coverage—effectively mitigate adverse selection using data from an insurance company. Regarding representation, we focus on statements disclosing pre‐existing medical conditions. Our findings show that for insured individuals with claims, claim costs are higher for those with pre‐existing conditions or who require medical examinations. These individuals are also charged extra premiums. However, their loss ratios do not significantly differ from those without pre‐existing conditions or medical examination requirements, possibly due to extra premiums. A quasi‐difference‐in‐differences (DID) analysis confirms that extra premiums significantly lower the loss ratio of high‐risk insureds, indicating that extra premiums serve as an effective underwriting mechanism. Lastly, insured individuals with pre‐existing conditions receive lower coverage than those without, a finding that contrasts with existing literature. Finally, using the method introduced by Chiappori and Salanie (2000), we find a statistically significant positive correlation between the residuals of coverage and claim costs (loss ratio), suggesting strong evidence of adverse selection. Overall, the evidence suggests that underwriting effectively mitigates adverse selection.