INFORMATION AND REGULATION IN LIFE INSURANCE: AN ECONOMIC ANALYSIS

This essay is a study in the economics of competition and regulation in the U.S. individual life insurance market. The scope of previous investigations of the performance of this market is expanded to include an analysis of the impact of regulation. This extension is important, as evidence is presented which strongly suggests that regulatory reform is the path of most potential for improvement in market performance.; Within the areas of competition and regulation of the life insurance market, there are four specific topics considered. The first is the examination of the contention of previous authors that price dispersion is extreme in this market. More generally, we consider the extent to which the market deviates from active price competition and, conversely, the potential benefits to an improvement in consumer information on the rate structure. The related normative issue, how best to improve consumer information, has been approached in the literature as the design of a "price" disclosure system and is the second topic considered. The third is the efficiency and equity aspects of nonforfeiture regulation which requires that policyholders withdrawing from a life insurance contract be equitably compensated for the assets accumulated on their behalf. An adverse selection resulting from imperfections in suppliers' information is the complication of the analysis of this regulation. Finally, the impact of an accounting regulation on the evolution of market rates is examined, the hypothesis being that the regulation has impeded the market response to the secular rise in nominal interest rates since the early 1950's.