Working Paper: NBER ID: w11039
Authors: Amy Finkelstein; Kathleen McGarry; Amir Sufi
Abstract: We examine whether unregulated, private insurance markets efficiently provide insurance against reclassification risk (the risk of becoming a bad risk and facing higher premiums). To do so, we examine the ex-post risk type of individuals who drop their long-term care insurance contracts relative to those who are continually insured. Consistent with dynamic inefficiencies, we find that individuals who drop coverage are of lower risk ex-post than individuals who were otherwise-equivalent at the time of purchase but who do not drop out of their contracts. These findings suggest that dynamic market failures in private insurance markets can preclude the efficient provision of insurance against reclassification risk.
Keywords: Insurance Markets; Reclassification Risk; Long-Term Care Insurance; Dynamic Inefficiencies
JEL Codes: D4; D8; I11; G22; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individuals who drop their long-term care insurance contracts (G52) | Dynamic selection process (C69) |
| Dynamic market failures (D52) | Overall size of the long-term care insurance market (G52) |
| Individuals who drop their long-term care insurance contracts (G52) | Individuals who are of lower risk ex post (D81) |
| Individuals who drop their long-term care insurance contracts (G52) | Nursing home use (I11) |
| Nursing home use (I11) | Individuals who retain their long-term care insurance coverage (G52) |