Archives

“You Want Insurance With That?” Using Behavioral Economics to Protect Consumers From Add-on Insurance Products

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Tom Baker & Peter Siegelman

Volume 20

Issue 1

PUBLISHED

Fall 2013

Abstract

Persistently high profits on “insurance” for small-value losses sold as an add-on to other products or services (such as extended warranties sold with consumer electronics, loss damage waivers sold with car rentals, and credit life insurance sold with loans) pose a twofold challenge to the standard economic analysis of insurance. First, expected utility theory teaches that people should not buy insurance for small-value losses. Second, the market should not, in the long run, permit sellers to charge prices that greatly exceed the cost of providing the insurance. Combining the insights of the Gabaix and Laibson shrouded pricing model with the behavioral economics of insurance, this article explains why high profits for add-on insurance persist and describes the negative distributional and welfare consequences of an unregulated market for such insurance. The article explores four potential regulatory responses: enhanced disclosure, a ban on point-of-sale offerings of add-on insurance, price regulation, and the creation of a new online market. Drawing on theoretical, empirical, and comparative law sources, the article explains why enhanced disclosure will not work, identifies the circumstances in which a point-of-sale ban is desirable, and argues that a new online market is preferable to price regulation when a point-of-sale ban is undesirable.

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NFL’s Litigation Skates Onto the Ice

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Melanie A. Orphanos

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This article addresses the insurance implications of the pending concussion litigation between the National Hockey League and its current and former players. The author draws comparisons to similar litigation brought against the National Football League and the NFL’s interactions with its insurers to forecast the obstacles the parties in the NHL litigation will face in establishing coverage by the many insurance carriers that have insured the NHL over time. The author identifies obstacles including determining when coverage is “triggered” and whether certain actions by the NHL will preclude coverage and relieve the insurers of their duty to defend under the policies’ “expected or intended” clauses.

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Minding the Gap: Seeking Autism Coverage in Class Actions When State and Federal Laws Fail

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Danielle M. Jaffee

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This Note examines the recent trend toward class actions challenging insurers’ denial of autism treatment coverage. The author analyzes how state and federal laws regarding insurance coverage for autism treatment create a gap that allows insurers to deny coverage, even despite overwhelming evidence of the benefits of such treatment for autistic individuals. Past individual challenges of insurers’ actions have provided little guidance to consumers about insurers’ legal obligations, and recent collective actions have done little to clarify these obligations. The author reviews the decisions of three courts addressing the certification of class challenges to insurers’ denials and offers suggestions for how consumers can successfully challenge insurers’ practices in future class actions.

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California Dreaming: The California Secure Choice Retirement Savings Trust Act

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Edward A. Zelinsky

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

Half of American workers are not covered by employer-sponsored retirement arrangements. The recently passed California Secure Choice Retirement Savings Trust Act seeks to solve this problem by mandating retirement savings arrangements for California employers, coupled with a public investment vehicle for investing these private retirement savings. The Act is particularly significant because of California’s size and its status as a trendsetter for other states. This Article is the first to examine the important legal questions the Act raises under the Internal Revenue Code and ERISA. Contrary to the drafters’ intent, the savings accounts authorized under the Act do not qualify as individual retirement accounts under the Code; as a result, employees participating in savings arrangements established under the Act will not receive the income tax benefits associated with individual retirement accounts. If the Act were amended to make its accounts individual retirement accounts, it would survive ERISA preemption under New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995), though not under Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983). Because Travelers is the Court’s more recent and more compelling construction of ERISA preemption, the Act should survive ERISA preemption if amended to create true individual retirement accounts.

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Retirement Policies and Related Social Changes in the Lifecycle

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Russell K. Osgood

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This Essay argues that retirement policies, including retirement income and healthcare sufficiency, should be crafted in light of demographic and lifestyle changes rather than as a means to solve a larger fiscal problem. The author studies workforce demographics and life expectancy in the decades following WWII as compared to today and discusses how other nations have attempted to solve the same problems currently facing the United States. As a means of addressing the increasing fiscal demands of paying for retirement, the article proposes an “omnibus” plan that extends the retirement age, introduces means testing for certain benefits as well as cutbacks, and proposes changes to the taxable wage base.

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Revenue Sharing in 401(k) Plans: Employers as Monitors?

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Dana M. Muir

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This article presents a discussion of the use of revenue sharing by mutual funds and 401(k) plan service providers. The author engages in a historical exploration of how revenue sharing has been used in 401(k) plans and highlights regulators’ increasing interest in ensuring disclosure of fund monies diverted for revenue-sharing purposes. In addition, the article discusses how the current federal regulatory framework for employee benefits has not adapted to the increased use of 401(k) plans. The author challenges the way ERISA places the burden of monitoring compensation to service providers on the employers who make the 401(k) plan available to their employees and instead proposes several alternative frameworks that would decrease employer responsibility and liability for investment selection.

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An Affordable Care Act for Retirement Plans?

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Amy B. Monahan

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

In the United States, the availability of tax subsidies for retirement savings is largely based on an individual’s employment status and on whether the individual’s employer has voluntarily chosen to offer a tax-favored savings vehicle. Even when an individual has access to an employer-sponsored retirement plan, such plans are too often suboptimally designed. This article proposes an incremental reform that ensures universal access to tax-favored retirement savings irrespective of employment status or employer decisions. Borrowing from the model of the Affordable Care Act, the article calls for the creation of an optional, universally available retirement plan designed according to both retirement savings and behavioral best practices. Such a plan would be structured to increase the number of Americans saving for retirement and to improve the likelihood that individuals will accumulate sufficient savings to maintain their standard of living throughout retirement. After discussing the design details for such a plan, the article concludes by examining the legal and practical challenges of implementing a universal retirement plan at either the federal or state level.

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Desperate Retirees: The Perplexing Challenge of Covering Retirement Health Care Costs in a Yoyo World

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Richard L. Kaplan

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This article explores the challenges that retirees face when selecting and paying for proper healthcare coverage after retirement. It examines the rising cost of healthcare as well as the complexities of Medicare plans that often make up a retiree’s coverage package. The author concludes that most retirees are not prepared to pay for healthcare in their retirement years.

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The Surprising Equality of Retirement Time: Evidence From the Health and Retirement Survey

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Anthony Bonen & Teresa Ghilarducci

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This article discusses the impact that changes to the retirement age may have on the distribution of retirement time. The author investigates the length of time men and women live between their retirement and death, finding that the most critical factor in determining retirement duration is an individual’s socioeconomic status. As a result, the author concludes that because individuals in lower economic classes tend to die earlier, increasing the retirement age will disproportionately affect these individuals and exacerbate retirement time inequality.

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Rethinking ERISA’s Promise of Income Security in a World of 401(k) Plans

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Lawrence A. Frolik

Volume 20

Issue 2

PUBLISHED

Spring 2014

Abstract

This article discusses the evolution of retirement income funds from defined benefit packages to 401(k) and IRA accounts and how this changing dynamic has reshaped the way retirees think about post-retirement income. It outlines the mechanics of 401(k) accounts and rollover IRAs in the post-retirement period and presents questions about the ability of retirees to successfully address the complex issues relating to investment choices, including which entity they entrust their savings to, the volume and source of distributions, and long-term sufficiency planning. The article suggests that an increase in the use of annuities may help resolve some of the challenges faced by today’s retirees.

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