Selection Behavior in the Market for Private Complementary Long-term Care Insurance in Germany

In this paper, we analyze selection effects in the German market for private complementary longterm care insurance contracts (CompLTCI) within a static and dynamic framework. Using data on more than 98,000 individuals from a German insurance company, we provide evidence that advantageous selection is dominating in this market, with respect to both the decision to buy a CompLTCI policy and the decision about the extent of CompLTCI coverage. We identify occupational status, residential location and the holding of further supplementary health insurance policies as unused observables contributing to selection effects in this market. Our results suggest that non-linearitiesin the relationship of potential sources of selection to insurance coverage and risk should be considered. A panel data analysis shows that an increase in health insurance payouts is positively correlated with the uptake of CompLTCI, while a decrease in those costs is positively associated with the lapse of CompLTCI. In addition, we find that people in financial distress and of lower socioeconomic status are more likely to let their CompLTCI policies lapse.