Essays on insurance markets

Abstract

This dissertation consists of three chapters on adverse-selection type insurance markets. Chapter 1 develops a model for analyzing non-exclusive insurance markets. It establishes that the "screening" considerations of models following Rothschild and Stiglitz (1976)-long applied for analysis of exclusive-contract insurance markets-also apply when contracting is non-exclusive and contracts are linearly priced. It characterizes the contracts offered in efficient markets and shows that screening and non-exclusivity together impose significant restrictions on the structure of insurance policies. In a two risk-type market for retirement annuities, market efficiency requires that either all annuities purchased will provide declining real income streams or else all will provide rising income streams. Chapters 2 and 3 examine the consequences of regulations which restrict the use of characteristic-based pricing in exclusive contracting insurance markets. Chapter 2 argues that restrictions on pricing on the basis of observable characteristics such as gender, race, or the outcomes of genetic tests are undesirable, since the distributional goals of these restrictions can be accomplished more efficiently by employing social insurance.

(cont.) In particular, it shows that a government which can provide pooled-price social insurance can relax restrictions on characteristic-based pricing while implementing a "compensatory" social insurance policy in a way that ensures no individual is harmed while some individuals gain. Chapter 3 is collaborative work with James Poterba and Amy Finkelstein. It starts from the observation that the "compensatory" social insurance policies identified in Chapter 2 are not typically employed in practice. When they are not, permitting characteristic-based pricing has both efficiency and distributional consequences vis a vis banning such pricing. We develop a methodology for empirically measuring the magnitudes of both consequences. We apply this methodology to evaluate the hypothetical imposition of a ban on gender-based pricing in the U.K. annuity market. We estimate that this imposition will re-distribute significant resources from short-lived men to long-lived women. The amount of re-distribution may be up to 50% less than would be predicted without accounting for the endogenous market response, however.