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

There is ongoing policy debate about whether government insurance coverage mandates are necessary to effectively address market failures in private insurance markets. This paper analyzes the demand for insurance in the absence of a coverage mandate and the potential market failure rationale for coverage mandates in the context of workers' compensation insurance. Workers' compensation is a state-regulated insurance program that provides employees with income and medical benefits in the event of work-related injuries or illnesses. Nearly all states have mandated workers' compensation insurance coverage; the sole exception is Texas. Using administrative data from the unique voluntary Texas workers' compensation insurance system, we estimate the demand for workers' compensation insurance leveraging idiosyncratic regulatory updates to relative premiums across industry-occupation classifications. The difference-in-differences estimates indicate that the demand for workers' compensation coverage is price-sensitive, with a 10% increase in premiums leading to approximately a 3% decline in coverage. Drawing upon these estimates and additional data on claim costs, we analyze the potential rationale for government intervention to increase coverage through subsidies or a mandate. This analysis suggests that classic market failure justifications for government intervention in insurance markets—such as adverse selection, market power, and externalities—may not be compelling justifications for a mandate in this setting.