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The Relationship between Auto Insurance Rate Regulation and Insured Loss Costs: An Empirical Analysis

Author
Tennyson, Sharon
Abstract
This study points out a potential unintended effect of efforts to enhance
affordability of insurance prices by regulating rates: It may ultimately lead to
higher insurance costs. This is because rate regulation that suppresses insurance
prices below competitive levels, or provides significant premium subsidies for
some consumers, creates a variety of incentive distortions in the market. The
article summarizes the theoretical arguments for this effect and provides empirical
evidence of cost-increasing effects of rate regulation. The analysis uses state-level
data on automobile insurance costs and claims rates for the period 1990 through
1998, and employs empirical methods that control for the possible reverse
causation of high insurance costs leading to consumer demand for rate regulation.
We find that bodily injury and property damage liability loss costs are higher in
rate-regulated states, and that the bodily injury to property damage liability claims
ratio is higher in regulated states.
Date Issued
2009Subject
Policy Analysis and Management
Previously Published As
Journal of Insurance Regulation Vol. 27 No. 1 Fall 2008: 23-46
Type
article