The Demand for Insurance and Rationale for a Mandate: Evidence from Workers' Compensation Insurance

Area of Science:

• Economics
• Insurance Markets
• Public Policy

Background:

• Workers' compensation insurance is typically mandatory, covering work-related injuries.
• A unique market without a coverage mandate allows for demand estimation.
• Regulatory premium updates serve as an identification strategy.

Purpose of the Study:

• To estimate the demand for workers' compensation insurance in a non-mandated market.
• To assess potential justifications for government intervention, such as mandates.
• To analyze the impact of premium changes on insurance coverage.

Main Methods:

• Utilized administrative data from a unique market lacking a workers' compensation insurance mandate.
• Employed regulatory premium updates for identification of demand elasticity.
• Calculated the effect of premium changes on insurance coverage levels.

Main Results:

• A 1 percent increase in workers' compensation insurance premiums corresponds to a 0.3 percent decrease in coverage.
• Analysis of costs and demand estimates was performed.
• Examined justifications for government intervention based on market failures.

Conclusions:

• Market failures such as adverse selection, market power, and externalities may not provide sufficient justification for a workers' compensation insurance mandate in this specific setting.
• The findings contribute to the debate on the necessity and efficacy of mandatory insurance policies.
• Further research could explore alternative policy interventions or specific industry contexts.