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Market design for the provision of social insurance: the case of disability and survivors insurance in Chile

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  • REYES, GONZALO

Abstract

As part of the pension reform recently approved in Chile, the government introduced a centralized auction mechanism to provide the Disability and Survivors (D&S) Insurance that covers recent contributors among the more than 8 million participants in the mandatory private pension system. This paper is intended as a case study presenting the main distortions found in the decentralized operation of the system that led to this reform and the challenges faced when designing a competitive auction mechanism to be implemented jointly by the Pension Fund Managers (AFP). When each AFP independently hired this insurance with an Insurance Company the process was not competitive, colligated companies ended up providing the service and distortions affected competition in the market through incentives to cream-skim members, efforts to block disability claims, lack of price transparency and the insurance contract acting as a barrier to entry. Cross-subsidies, inefficient risk pooling and regulatory arbitrage were also present. The Chilean experience is relevant since other privatized systems with decentralized provision of this insurance may show similar problems as they mature. A centralized auction mechanism solves these market failures, but also gives raise to new challenges, such as how to design a competitive auction that attracts participation and deters collusion. Design features that were incorporated in the regulation to tackle these issues are presented here. .

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 9 (2010)
Issue (Month): 03 (July)
Pages: 421-444

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Handle: RePEc:cup:jpenef:v:9:y:2010:i:03:p:421-444_99

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  1. Professor Paul Klemperer, 2000. "What Really Matters in Auction Design," Microeconomics 0004008, EconWPA.
  2. Solange Berstein & Carolina Cabrita, 2006. "Los Determinantes de la Elección de AFP en Chile: Nueva Evidencia a Partir de Datos Individuales," Working Papers 19, Superintendencia de Pensiones, revised Jul 2007.
  3. Eduardo Saavedra & Manuel Willington, 2008. "Diseño de la Subasta Optima para el Seguro de Invalidez y Sobreviviencia en Chile," ILADES-Georgetown University Working Papers inv209, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  4. Gonzalo Reyes & Rubén Castro, 2008. "Medidas Pro-Competencia de la Reforma Previsional," Working Papers 29, Superintendencia de Pensiones, revised Dec 2008.
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Cited by:
  1. María Angélica Arbeláez & Jorge Humberto Botero & Alejandra González & Camila Salamanca, 2011. "Sostenibilidad del seguro previsional en Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO 009066, FEDESARROLLO.

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