Dynamic Pricing Regulation and Welfare in Insurance Markets

This paper examines the impact of dynamic pricing regulation on market outcomes and social welfare in the U.S. long-term care insurance (LTCI) market. We first provide descriptive evidence that the introduction of rate stability regulation, which limits insurers’ ability to increase premiums over the lifetime of a contract, improved rate stability while reducing product variety. To quantify this trade-off, we develop and estimate a dynamic equilibrium model of LTCI where insurers have market power and cannot commit to future premiums. Our estimates suggest that consumers’ demand for LTCI is relatively price inelastic. However, insurers do not charge a high markup due to various pricing regulations. Using the estimated model, we conduct counterfactual experiments to assess the welfare effect of dynamic pricing regulation. We find that a stricter rate stability regulation lowers social welfare as the benefit from improved rate stability is outweighed by the cost from reduced product variety.