Risk preference in health insurance: is there evidence of advantageous selection?

The health insurance industry is faced with risk selection issues affecting insurers’ sustainability and enrolment of consumers in an insurance programme. Inefficient selection results in the insurer having a pool of severely unhealthy participants who are costly to insure. Thus, this study was conducted to examine the current profiles of policyholders and to investigate the presence of advantageous or propitious selection. The specific objectives were to compare the profiles of insureds and uninsureds, and to determine the factors affecting an individual’s decision to own personal health insurance. More importantly, the study was to demonstrate empirically whether the selection of risk is favourable and advantageous to insurers by examining the association among risk attitude, health risk level and ownership of health insurance. The fundamental theories used were the Theory of Asymmetric Information and the Theory of Propitious Selection. The data in this study was obtained from the National Health and Morbidity Survey 2011 and analysed using bivariate analysis tools and Logistics Regression. The analysis reveals that insureds are generally younger, employed in the government and the private sectors as well as self-employed, with low health risk levels and high risk aversion. The empirical analysis suggests three main findings. First, ownership of personal health insurance is predicted by age and gender. Second, individuals with low health risks and individuals who are risk-averse are more likely to own personal health insurance. Third, health risk level is negatively correlated with risk aversion. The findings suggest that there is evidence of advantageous selection in the Malaysian health insurance market. The study concludes that the selection of insureds has been effective and favourable to insurers, suggesting greater ability to counter the effect of adverse selection