Working Paper: NBER ID: w18172
Authors: David Autor; Mark Duggan; Jonathan Gruber
Abstract: We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies using a database of approximately 10,000 policies and 1 million workers from a major LTD insurer. We document that LTD claims rates are much lower than claims rates on the public analogue to LTD, the Social Security Disability Insurance program, yet LTD policies have a much higher return-to-work rate among initial claimants. Nevertheless, our analysis indicates that the impact of moral hazard on LTD claims is substantial. Using within firm, over time variation in plan parameters, we find that a higher replacement rate and a shorter waiting time to benefits receipt--also known as the Elimination Period or EP--significantly increase the likelihood that workers claim LTD. About sixty percent of the effect of a longer EP is due to censoring of shorter claims, while the remainder is due to deterrence: workers facing a longer EP are less likely to claim benefits for impairments that would lead to a only a brief period of LTD receipt. This deterrence effect is equally large among high and low-income workers, suggesting that moral hazard rather than liquidity underlies the behavioral response. Consistent with this interpretation, the response of LTD claims to plan parameters is driven primarily by the behavior of the healthiest disabled, those who would return to work after receiving LTD.
Keywords: Disability Insurance; Moral Hazard; Claims Deterrence; Private Insurance
JEL Codes: H55; I13; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher replacement rate (H55) | Increased likelihood of claiming LTD benefits (J32) |
| Longer elimination period (G52) | Reduced likelihood of claiming LTD benefits (J32) |
| Longer elimination period (G52) | Higher duration of claims (C41) |
| Health status of claimants (I12) | Claims process (G52) |
| Healthiest claimants (I12) | Responsiveness to plan parameters (E61) |