Equal Prices, Unequal Access: The Effects of National Pricing in the US Life Insurance Industry

Abstract

Regulators often promote financial inclusion by restricting prices. In response, firms may reduce the supply of their product, implying that some households lose from reduced access. This paper explores this tradeoff in the context of national price setting regulation in the US life insurance industry. I collect a new data set with over one million insurer-agent links across a subset of US commuting zones and document that poor commuting zones have fewer agents per household, fewer active insurers, and smaller and lower-rated insurers relative to rich commuting zones. Motivated by the data, I build a spatial model with multi-region insurers and households with heterogeneous preferences for differentiated life insurance products. The model captures the empirical spatial sorting patterns and admits clear predictions for how insurer location choices change in response to national pricing. I take the model to the data and estimate price elasticities for low- and high-income households. Under flexible pricing, welfare differences between the poorest commuting zones and the richest commuting zone are between 0.4-0.95% of yearly income, most of which comes from differential access to insurers. National pricing amplifies spatial access disparities due to the geographic reallocation of insurers toward richer markets. Place-based tax policies that target the access margin reduce welfare differences between poor and rich commuting zones by 10.3-20.6%.