Workers' Moral Hazard and Insurer Effort in Disability Insurance

It has been well-documented that Disability Insurance (DI) may cause moral hazard in terms of higher disability risk and lower employment. For supplementary insurance from private insurers, however, the effects are less well understood: extra coverage may further increase workers' moral hazard, but private insurers may have a financial incentive to reduce benefit payments with prevention and reintegration activities. This paper aims to separate such worker and insurer responses to increased coverage. We use unique administrative data on firm contracts on supplementary DI in the Netherlands. We exploit the fact that variation in statutory public DI benefits only affects the incentive of disabled workers to use their remaining earnings capacity, whereas extra coverage from non-statutory supplementary DI affects both the financial interest of workers and the insurer. Using a Two-way Fixed-Effects model on sickness and employment rates of worker cohorts that may switch to supplementary insurance, we find that insurer effort counteracts workers' moral hazard