Working Paper: NBER ID: w30952
Authors: Naoki Aizawa; Ami Ko
Abstract: While the traditional role of insurers is to provide protection against idiosyncratic risks of individuals, insurers themselves face substantial uncertainties due to aggregate shocks. To prevent insurers from passing through aggregate risks to consumers, governments have increasingly adopted dynamic pricing regulations that limit insurers' ability to change premiums over time. This paper develops and estimates an equilibrium model with dynamic pricing and firm entry and uses it to evaluate the design of dynamic pricing regulations in the U.S. long-term care insurance (LTCI) market. We find that stricter dynamic pricing regulation lowers social welfare as the benefit from improved premium stability is outweighed by the cost of reduced insurer participation. The welfare loss from stricter dynamic pricing regulation could be mitigated if the government also expands public LTCI through Medicaid.
Keywords: No keywords provided
JEL Codes: D14; G22; I13; L11; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stricter dynamic pricing regulation (D49) | Lower insurer participation (G52) |
| Stricter dynamic pricing regulation (D49) | Lower social welfare (D69) |
| Lower insurer profits (G52) | Lower insurer participation (G52) |
| Stricter dynamic pricing regulation (D49) | Lower insurer profits (G52) |
| Public LTCI expansion (Medicaid) (G52) | Mitigated welfare loss from stricter dynamic pricing regulation (D40) |
| Dynamic pricing regulation (D49) | Improved consumer welfare (D18) |
| Dynamic pricing regulation (D49) | Higher markups by insurers (G52) |
| Higher markups by insurers (G52) | Adverse effect on overall welfare (I38) |