Is the Social Welfare Effect of Pet Insurance Non-Monotonic? Evidence from Veterinary Price Dispersion and Treatment Access

This paper examines whether expanding pet insurance improves social welfare in a veterinary market without price regulation. Two structural features distinguish this market from the settings in which standard insurance welfare frameworks were developed. The first is extreme price dispersion: the estimated cost distribution in the current Korean market implies that a guardian visiting a randomly chosen hospital faces costs that could plausibly differ from the market median by several hundred percent. The second is economic euthanasia, a discontinuous demand mechanism through which demand drops to zero instantaneously when treatment costs exceed a guardian's willingness to pay. We construct a welfare function that decomposes net social welfare into three components: the Rescue Benefit from preventing economic euthanasia, the Price Distortion Loss from insurance-induced demand shifts toward high-cost providers as price search incentives weaken, and the Loading Cost embedded in the insurance premium. Calibrating the supply side from the complete universe of Korean pet insurance claims and the demand side from household survey microdata, a Monte Carlo simulation traces net welfare across varying levels of price dispersion. Net welfare follows an inverted-U trajectory, turning negative beyond a critical dispersion threshold. The current Korean market exceeds this threshold by approximately 78 percent in the dog market and 39 percent in the cat market, a conclusion that holds across all 27 insurance product parameter combinations examined. Supply-side reforms such as standardizing veterinary service items and mandating price disclosure are identified as necessary preconditions for insurance activation to generate welfare gains.