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Adverse selection is a serious problem for the insurance industry. People who face the greatest risks, or are the most likely to make claims, are the ones most anxious to buy insurance. But these are the very people that the insurance companies are least happy to welcome as customers. Martin Godfried, Hessel Oosterbeek, and, and Frank Van Tulder examined the role of adverse selection in the purchase of dental insurance in the Netherlands.a In 1995 the Netherlands government decided to exclude dental services from the standard health insurance package covering 60% of the Dutch population. Individuals, formerly automatically covered, now had to choose whether or not to purchase dental insurance.

If voluntary dental insurance has to be offered on the same terms to all, regardless of the condition of teeth, adverse selection is inevitable. Conversely, adverse selection will be moderated to the extent that insurers can charge differential rates. For some time after the policy change in the Netherlands, private insurance suppliers were under political pressure to charge the same rates to everyone regardless of the condition of their teeth. Moreover, no applicants were to be refused. In these circumstances, adverse selection could be expected.

Statistically, the authors found poorer quality of teeth raised the probability of becoming insured. Also, individuals who customarily visited dentists more frequently were found to be more likely to choose insurance. Among those who chose to insure after the change in policy, 93% customarily visited the dentist twice a year. Among those who chose not to insure, it was only 82%. So people whose teeth were of poorer quality, or people more anxious about dental health, were indeed more likely to purchase the insurance.


a Martin Godfried, Hessel Oosterbeekand, and Frank Van Tulder, “Adverse Selection and the Demand for Supplemental Insurance,” De Economist,v.149 (2002), pp. 177–190.



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