To insure policyholders against contemporaneous health expenditure shocks and future reclassification risk, long-term health insurance constitutes an alternative to communityrated short-term contracts with an individual mandate. Relying on unique claims panel data from a big private insurer in Germany, Atal, Fang, Karlsson, and Ziebarth study a real-world long-term health insurance application with a life-cycle perspective. They show that German long-term health insurance (GLTHI) provides large welfare gains compared to a series of risk-rated short-term contracts. Although, by design, the GLTHI contract differs substantially from the optimal dynamic contract, the researchers only find modest welfare differences between the two. Moreover, they show that a simple modification to the GLTHI contract would further close this welfare gap. Finally, the researchers conduct counterfactual policy experiments to illustrate the welfare consequences of integrating GLTHI into a system with a "Medicare-like" public insurance that covers people above 65.
In addition to the conference paper, the research was distributed as NBER Working Paper w26870, which may be a more recent version.
The Medicare Advantage program enables Medicare recipients to receive their health care benefits via private insurance plans instead of through the federal government. Insurers receive a payment from the government for each individual enrolled, and may add additional benefits and charge an additional premium - an approach which mirrors many other goods provided via a government subsidy. The optimal subsidy in different markets - conditional on a fixed amount of government expenditures across all markets - depends on the interactions between consumer demand and supply-side responses to changes in the payments offered by the government. However, governments subsidies are typically pegged only to a measure of average cost. Miller, Petrin, Town, and Chernew study optimal subsidy design in Medicare Advantage by estimating a flexible supply and demand systems in an oligoply setting that features demand-side heterogeneity and switching costs, and supply-side price-setting and benefit design behavior. They find that the optimal subsidy structure differs from the implemented one and significantly improves consumer surplus.
In addition to the conference paper, the research was distributed as NBER Working Paper w25616, which may be a more recent version.
Purchasing an annuity insures an individual against the risk of outliving their money, by promising a steady stream of income until death. Despite the fact that retirement asset allocation models predict high annuitization rates, private annuity markets tend to function poorly, with low annuitization rates and high markups. Chile provides a counterexample to this phenomenon, as over 60% of eligible retirees purchase annuities from the private market and observed markups are low. Illanes and Padi show that Chilean social security policy promotes private annuitization, in contrast to U.S. social security policy. They do so by building a lifecycle consumption-savings model and showing through calibrations that the Chilean setting is likely to have lower levels of adverse selection and is more robust to market unraveling than the US. The researchers then use a novel administrative dataset on all annuity offers made to Chilean retirees between 2004 and 2013 to estimate a flexible demand system built on top of the consumption-savings model. The model estimates allow us to simulate how the Chilean equilibrium would shift under alternative regulatory regimes. The researchers find that reforming the Chilean system to more closely resemble the U.S. Social Security system, by introducing mandatory annuitization of a fraction of wealth at the actuarially fair rate, raises prices and can lead to full market unravelling. When comparing welfare between both systems, however, retirees with high valuations for annuitization tend to prefer a U.S. style system while retirees with low valuations tend to prefer the Chilean system. The former tend to value the high annuity rate from Social Security, even if further annuitization is not possible, while the latter dislike mandatory annuitization. Highly heterogeneous preferences across retirees appear to drive annuity market behavior.
Financial intermediaries often provide guarantees that resemble out-of-the-money put options, exposing them to tail risk. Using the U.S. life insurance industry as a laboratory, Ellul, Kartasheva, Jotikasthira, Lundblad, and Wagner present a model in which variable annuity (VA) guarantees and associated hedging operate within the regulatory capital framework to create incentives for insurers to overweight illiquid bonds (“reach-for-yield”). They then calibrate the model to insurer-level data, and show that the VA writing insurers’ collective allocation to illiquid bonds exacerbates system-wide fire sales in the event of negative asset shocks, plausibly erasing up to 20-70% of insurers’ equity capital.
Life insurance premiums display significant rigidity in the data, on average adjusting once every 3 years by more than 10%. This contrasts with the underlying marginal cost which exhibits considerable volatility due to the movements in interest and mortality rates. Paluszynski and Yu build and calibrate a model where policyholders are held-up by long-term insurance contracts, resulting in a time inconsistency problem for the firms. The optimal contract takes the form of a simple cutoff rule: premiums are rigid for cost realizations smaller than the threshold, while adjustments must be large and are only possible when cost realizations exceed it.
Insurance markets often feature consumer sorting along both an extensive margin (whether to buy) and an intensive margin (which plan to buy), but most research considers just one margin or the other in isolation. Geruso, Layton, McCormack, and Shepard present a graphical theoretical framework that incorporates both selection margins and allows them to illustrate the often surprising equilibrium and welfare implications that arise. A key finding is that standard policies often involve a trade-off between ameliorating intensive vs. extensive margin adverse selection. While a larger penalty for opting to remain uninsured reduces the uninsurance rate, it also tends to lead to unraveling of generous coverage because the newly insured are healthier and sort into less generous plans. While risk adjustment transfers shift enrollment from lower- to higher-generosity plans, they also sometimes increase the uninsurance rate by raising the prices of less generous plans, which are the entry points into the market. The researchers illustrate these trade-offs in an empirical sufficient statistics approach that is tightly linked to the graphical framework. Using data from Massachusetts, they show that in many policy environments these trade-offs can be empirically meaningful and can cause these policies to have unexpected consequences for social welfare.
The Affordable Care Act (ACA) established health insurance marketplaces where consumers can buy individual coverage. Leveraging novel credit card and bank account micro-data, Diamond, Dickstein, McQuade, and Persson identify new enrollees in the California marketplace and measure their health spending and premium payments. Following enrollment, the researchers observe dramatic spikes in individuals' health care consumption. The researchers also document widespread attrition, with more than half of all new enrollees dropping coverage before the end of the plan year. Enrollees who drop out re-time health spending to the months of insurance coverage. This drop-out behavior generates a new type of adverse selection: insurers face high costs relative to the premiums collected when they enroll strategic consumers. The researchers show that the pattern of attrition undermines market stability and can drive insurers to exit, even absent differences in enrollees' underlying health risks. Further, using data on plan price increases, the researchers show that insurers largely shift the costs of attrition to non-dropout enrollees, whose inertia generates low price sensitivity. The results suggest that campaigns to improve use of social insurance may be more efficient when they jointly target take-up and attrition.
In addition to the conference paper, the research was distributed as NBER Working Paper w24668, which may be a more recent version.
Greenwood and Vissing-Jorgensen document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. The researchers draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. The researchers describe settings in which pension discount rules can have a destabilizing impact on bond markets.
Recent years have seen a spread of unemployment insurance (UI) programs to mid-income and developing countries. Yet little is known about how labor market characteristics in these countries, for example large informal labor markets, interact with the incentive effects of UI. Schoenherr, Skrastins, and Doornik show that firms and workers collude to extract rents from the UI system in the presence of large informal labor markets. Exploiting a discontinuous effect of an unemployment insurance reform in Brazil, they document layoff and rehiring patterns consistent with collusion between firms and workers to extract rents from the UI system. Firms and workers time formal unemployment spells to coincide with workers' eligibility for UI benefits. Survey evidence suggests that firms employ workers informally while they are eligible for UI benefits and rehire them when benefits end. Combined with a lower probability of hiring replacement workers when laying off workers eligible for UI benefits, this suggests that firms employ workers informally while they are on benefits. Firms and workers share the rents extracted from the UI system through lower equilibrium wages. All the observed patterns are mostly driven by industries and municipalities with large informal labor markets. The findings thus suggest that optimal UI design in mid-income and developing countries needs to take into account adverse incentive effects generated by collusion between firms and workers in the presence of informal labor markets.