Insurance Pricing, Distortions, and Moral Hazard: Quasi-Experimental Evidence from Deposit Insurance

George F. Shoukry

Pricing is integral to insurance design, directly influencing firm behavior and moral hazard, though its effects are insufficiently understood. I study a quasi experiment in which deposit insurance premiums were changed for U.S. banks with unequal timing, generating differentials between banks in both levels and risk-based “steepness” of premiums. I find evidence that differentials in premiums resulted in distortions, including regulatory arbitrage, but also provided strong incentives to curb moral hazard. I find that firms that faced stronger pricing incentives to become (or remain) safer were more likely to subsequently do so than similar firms that faced weaker pricing incentives.