Seminars

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. Wefind 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.