Insurance Market Participation Under Symmetric Information

with Tomas Philipson


Market participation costs have been used to model frictions in financial markets ranging from bonds to futures, but what are their implications for insurance markets? Market participation costs imply that the types of people who are insured, and the types of contingencies insured, are determined by risks, wealth, risk aversion, and the magnitude of the participation cost. The costs, to the extent they are encountered by insurers, imply bulk discounts, bundling, and multiple policy discounts. We examine insurance company financial statements, employment, and life insurance pricing, and find that insurance company loadings are 25-30% of premiums, most of which is a fixed cost. Fixed costs of this magnitude easily rationalize uninsurance for significant numbers of people, even when information is symmetric.

in preparation for the Jan 2004 meetings of the American Economic Association.

© copyright 2003 by Casey B. Mulligan and Tomas Philipson.