Informal care provided by adult children substitutes for formal long-term care services. However, information about children is not used in pricing long-term care insurance which pays only for formal care. I start by providing descriptive evidence that private information about children’s informal care likelihood results in adverse selection: the market attracts a disproportionate number of individuals who face higher formal care utilization risk due to a lower probability of receiving care from their children. To quantify the welfare consequence of adverse selection, I develop and estimate a dynamic intergenerational model featuring long-term care insurance, savings, informal care provision, and employment choices. Based on the estimated equilibrium insurance market framework, I show that using information about children in pricing insurance contracts reduces adverse selection and results in the average welfare gain of $6,200 per family. Using the non-cooperative feature of the model, I also quantify to what extent parents forgo long-term care insurance to avoid diminishing children’s informal care incentive.

While the traditional role of insurers is to provide protection against individuals? idiosyncratic risks, insurers themselves face substantial uncertainties due to aggregate shocks. To prevent insurers from passing these aggregate risks onto consumers, governments have increasingly adopted dynamic pricing regulations, which limit insurers? ability to change premiums over time. We evaluate dynamic pricing regulation using an equilibrium model of the US long-term care insurance market, featuring insurers? lack of commitment and endogenous market structures. We find that stricter dynamic pricing regulation has a limited impact on improving consumer welfare, while it reduces insurer profits and increases market concentration.