Do Firms with Low Disability Risks Opt Out from Public to Private Insurance?

Abstract

In the Netherlands, firms may opt out from public to private disability insurance (DI). Opponents of this “mixed market” for insurance argue that it may trigger a segmentation between firms with high risks with public insurance and low disability risks with private insurance. This article tests the importance of such risk segmentation, using administrative information on DI benefits and opting-out decisions of a panel of about 250,000 Dutch firms between 2007 and 2011. We find strong selection into private insurance of firms with low recent DI inflow rates and low current sickness rates. Accordingly, private insurers succeeded in attracting firms with low anticipated DI benefit costs in the first years to come. Our results also suggest that these effects are transitory – that is, firms that opted out have DI risks that are not structurally lower.