Adverse selection and government intervention in life and health insurance markets

Abstract

This thesis examines the workings of insurance markets. The first two papers examine the effect of government tax and regulatory policy in markets for supplementary health insurance. The third paper presents new evidence of the importance of adverse selection in insurance markets. The first paper examines the empirical consequences of imposing binding minimum standards on the market for private health insurance for the elderly in the United States. I find robust evidence of a substantial (40 percent) decline in insurance coverage associated with imposing these minimum standards. The standards are also associated with a reduction in coverage of non-mandated benefits among the insured. The minimum standards therefore, while requiring additional insurance coverage among the insured, were also associated with both extensive and intensive declines in insurance coverage. Considering all of these various changes, I estimate that the standards were, on net, welfare reducing. The second paper presents new evidence of the effect of the tax subsidy to employer-provided health insurance on coverage by such insurance.

(cont.) I study the effects of a 1993 tax change that reduced the tax subsidy to employer-provided supplementary health insurance in Quebec by over half. Using a differences-in-differences methodology in which changes in Quebec are compared with changes in other Canadian provinces not affected by the reform, I estimate an elasticity of employer coverage with respect to the tax price of -0.46 to -0.49. The tax subsidy appears much more critical to the provision of supplementary health insurance in small firms than in larger ones. The third paper, written jointly with James Poterba. re-examines the importance of adverse selection in insurance markets. We use a unique data set of all annuity policies sold by a large U.K. insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies. We find systematic relationships between ex-post mortality and annuity policy characteristics that are consistent with models of asymmetric information in insurance markets. We confirm that the pricing of features of annuity contracts is consistent with the self-selection patterns we find in mortality rates.