Market Design for the Provision of Social Insurance: The Case of Disability and Survivors Insurance in Chile
AbstractAs 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 InfoPaper provided by Superintendencia de Pensiones in its series Working Papers with number 37.
Date of creation: Feb 2010
Date of revision: Feb 2010
Disability insurance; private pensions; market failure; auction design;
Other versions of this item:
- Reyes, Gonzalo, 2010. "Market design for the provision of social insurance: the case of disability and survivors insurance in Chile," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(03), pages 421-444, July.
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