Chilean Long-Term Health Insurance : Lapsing in Markets with Guaranteed Renewable Contracts

In theory, guaranteed renewable (GR) insurance contracts can efficiently protect individuals against reclassification risk without the negative side effects of price regulation, such as adverse selection. For these contracts to work properly, consumers must pay front-loaded premiums when healthy and stick with their contracts for many years in order to subsidize their future high-risk selves. This paper studies lapsing in the Chilean private health insurance market, a system characterized by the offering of GR contracts and that provides access to health care to more than 15% of the population in Chile. I find that most policyholders lapse their insurance plans just a few years after signing their contracts, with less than 27% of them staying in the same plan after 70 months. I show that policies and lapse patterns predicted by standard theoretical models of long-term contracts are the opposite of those observed empirically. Finally, premiums increasing over time, and consumers lapsing their contracts because of these price fluctuations, are a key determinant of insurers’ profits.These characteristics have led to a system in which consumers feel uncertain about their future health care coverage, the opposite goal of long-term contracts