Adverse Selection and the Demand for Supplementary Dental Insurance

In 1995 dental services were excluded from the compulsory health insurance package that covers the families of all Dutch employees in the market sector with incomes below a certain threshold. People had to choose between no insurance and supplementary insurance. The exclusion of dental services was unexpected and was accompanied by a generous acceptance policy and almost uniform premiums. Due to these features the exclusion constitutes a natural experiment to investigate whether customers with poorer teeth conditions are more likely to buy insurance. This is a key condition for adverse selection to matter. The empirical results show that adverse selection indeed occurs; individuals with poor teeth condition are more likely to choose insurance. The same holds for customers with more frequent visits in the past. Differences in prices play some role, whereas differences in income do not.