Adverse Selection and Equity in Insurance Markets with Guaranteed Renewable Contracts: Evidence from Chile

Cristian Figueroa (Boston College), Adverse Selection and Equity in Insurance Markets with Guaranteed Renewable Contracts: Evidence from Chile (2022):

In theory, guaranteed renewable (GR) insurance contracts can efficiently insure against reclassification risk without causing adverse selection on pre-existing conditions. In practice, however, adverse selection can still arise on other dimensions. In 2020, in response to protests demanding gender equality, Chile banned gender-based pricing in its private health insurance market. I investigate how this policy impacts Chile’s health care system, which consists of a low-quality public option and a private market characterized by the use of GR contracts. I find that, if the ban is implemented, prices in the private market would increase by more than 30% as low-cost men switch to the public option and high-cost women enter. Overall, the regulation causes annual consumer surplus to increase $373 per insured woman and decrease $279 per insured man, which is around 2% and 1% of average annual per capita income, respectively. The ban is regressive, as high-income groups benefit more than low-income groups, creating a trade-off between gender-based equity and income-based equity. Subsidies that induce low-cost enrollees to remain in the private market are the most effective mitigation strategy to contain higher premiums. Finally, relative to non-GR contracts, the number of individuals choosing the private market is lower under guaranteed renewability.