Presentation of the paper

The welfare cost of unpriced heterogeneity in insurance markets

Speaker

Paolo Li Donni

Università di Palermo

Abstract

Paolo Lidonni and Valentino Dardanoni (Università di Palermo)

We consider the welfare loss of unpriced heterogeneity in insurance markets,  which results when private information or regulatory constraints prevent insurance companies to set premiums reflecting expected costs. We propose a methodology which uses survey data to measure this welfare loss. After identifying some `deep types' which determine expected risk and insurance demand, we use these deep types to derive the demand and cost functions for each unobservable type, quantifying the efficiency costs of unpriced heterogeneity. We apply our methods to the US Long-Term Care and Medigap insurance markets, where we find that unpriced heterogeneity causes substantial inefficiency.

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