Universal Life Insurance: Imperfect Competition

How do life insurance markets operate within the classic textbook framework? Is the market perfectly competitive, or do some frictions exist that cause macro-level inefficiencies? The answer depends on what type of insurance product you are looking at, as term insurance and universal life insurance markets have drastically different competitive elements.1

Term life insurance is, all things considered, a very simple form of insurance which is consistent with other lines of insurance such as health or auto. Assuming, for example, that a 35 year old male will need coverage for 10 years, a fixed cost payable annually can cover that risk. When shopping competitively for rates, this individual has one primary element to consider: the amount of the premium. Because of the simplicity of the insurance, consumers can fairly easily compare rates to find the lowest cost policy. This is as close to a perfectly competitive market as exists in financial markets, on par with bonds and other "plain vanilla" assets.

Escheat Law: The Revenue Motive

Modern escheat law is the process by which the state designates property held by one party but owned by another as "abandoned" and seizes it from the current holder. Most people have heard very little about modern escheat law, and for good reason: While states claim that the escheatment of unclaimed property is intended to look out for the rightful owners of the property, many would be surprised to know how much revenue is generated for state governments in the process.

Aside from the obvious criticisms that can be made against the state being an effective protector of property rights (see: eminent domain, asset forfeiture, property taxation, etc.), I will argue here that the primary, and perhaps sole motivation for modern unclaimed property law is the revenue motive. The various points of evidence toward this conclusion are: (a) the low percentages of property reunited with owners once in the hands of state treasuries; (b) court opinions which have explicitly referred to these laws as revenue raisers; (c) the large percentage of property abrograted which goes to the state's general fund rather than a dedicated trust fund for claimants; and (d) recent moves by state governments to shorten the period of inactivity required to deem property as "abandoned."