The Effect of Political Frictions on Long Term Care Insurance

Despite sharply rising prices, the number of companies choosing to sell private long-term care insurance (LTCI) has dropped from over 100 to just over 30 today. This paper analyzes how product mispricing and regulators' political incentives jointly affected insurer participation in the LTCI market. Using detailed pricing data, we find that four attributes of the state regulator -- time to re-election, political capital, political affiliation, and campaign funding -- significantly affected price changes and insurer profits. To understand regulators' equilibrium effects on LTCI supply, we then develop and estimate a dynamic structural model. Our model captures the political incentives of the regulator and produces frictions in product pricing when cost shocks are large and unpredictable. Using the calibrated model, we find that removing regulators' election cycles would significantly increase social welfare -- equivalent to removing 8% of total cost shocks.