The Incentive Effects of Automobile Insurance Rate Regulation on Claim Frequency and Loss Costs: An Empirical Analysis (original) (raw)
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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.
State regulation of rates is sometimes used as a means to make automobile insurance more affordable to consumers by restricting insurer profits and pricing practices. Incentive distortions arising from this type of rate regulation might lead to higher accident rates and higher insurance loss costs. Annual state-level panel data for the time period 1980-1998 are used to investigate these effects, using empirical methods that recognize the endogenous determination of states' regulatory choices. Results suggest that rate regulation that systematically suppresses (some or all) drivers' insurance premiums is associated with significantly higher average loss costs and higher insurance claim frequency.
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AbstractThe article tests the hypothesis that insurance price subsidies created by rate regulation lead to higher insurance cost growth. The article makes use of data from the Massachusetts private passenger automobile insurance market, where crossâsubsidies were explicitly built into the rate structure through rules that limit rate differentials and differences in rate increases across driver rating categories. Two approaches are
State regulation and the structure, conduct, efficiency and performance of US auto insurers
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This research investigates the impact of regulation on state automobile insurance markets while controlling for other state insurance market characteristics that may be related to performance. Data for a large sample of insurers are analyzed. The results suggest that insurers in competitive and non-stringently regulated states may benefit from market power by charging higher unit prices, however insurers in these states are on average more cost X-efficient and cost X-efficient insurers charge lower prices and earn smaller profits. The empirical results also suggest that insurers in some rate regulated states are less revenue and cost-scale efficient than in competitive states.
The Journal of Law and Economics, 2006
Insurance fraud, which adds an estimated $85 billion per year to the total insurance bill in the U.S., is an extremely serious problem for consumers, regulators, and insurance companies. This paper analyzes the effects of state legislation and market conditions on automobile insurance fraud from 1988 to 1999, a period representing a substantial increase in the enactment of antifraud legislation. Our empirical results show that the laws have mixed effects; two laws have no statistically significant effect on fraud. The strongest evidence of fraud mitigation effects are associated with mandatory Special Investigation Units, classification of insurance fraud as a felony, and mandatory reporting of professionals to licensing authorities. However, laws requiring insurers to report potentially fraudulent claims to law enforcement authorities increase fraud, which may reflect some substitution from more efficacious private efforts to less productive state activity. Many underlying characteristics of the market also affect fraud.
The Incentive Effects of Increasing Per-Claim Deductible Contracts in Automobile Insurance
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A new rating system of automobile insurance for vehicle damage in Taiwan was launched in 1996, introducing a deductible that increases with the number of claims. In this article, we provide a theoretical rationale for the existence of an increasing per-claim deductible system and show that the new system is most likely an optimal choice for those insured who tend to have lower claims probability when incentives are present. Using a unique dynamic data set, we are able to conduct a natural experiment to examine the incentive effects (both positive and negative) by looking at the change in claim tendency before and after switching between two deductible plans: an increasing per-claim deductible and a zero deductible. Our results provide direct evidence of the effects of deductible structures on claim behavior.
Market Structure and Performance in Private Passenger Automobile Insurance
The Journal of Risk and Insurance, 1998
The exemption of the insurance industry from federal antitrust law has generated some controversy, particularly in light of the well-publicized price and availability crises in certain lines of insurance. Antitrust restrictions in the United States are generally based on the assumption that high levels of concentration in an industry will make it more likely that firms will collude to raise prices and restrict supply, resulting in higher prices for consumers. This study examines the relationship between profitability and market structure in automobile insurance and tests for the existence of a positive relationship between concentration and performance. The results of the analysis show a significant positive impact of concentration on profitability for combined liability and physical damage lines in private passenger automobile insurance for the period 1984 through 1992. Differences in rate regulation across states are not found to impact profitability. 9 Information on minimum capital requirements by state was obtained from the National Association of Insurance Commissioners. 10 The WAGE date is the reported average wage by state for SIC classification 6331 (fire, marine, and casualty insurance) from County Business Patterns for the years in question. 11 This data is taken from the National Economic, Social, and Environmental Data Bank, U.S. Department of Commerce (August 1995). 12 A competitive regulatory environment includes states with file-and-use, use-and-file, and no regulation. Non-competitive regulation includes prior approval, modified prior approval, and file-anduse with bureau adherence. This data was obtained from the National Association of Insurance Commissioners.
Moral hazard in insurance claiming: Evidence from automobile insurance
Journal of Risk and Uncertainty, 1996
This article provides new evidence on moral hazard in insurance markets by analyzing the frequency of automobile bodily injury liability (BIL) claims. We conduct cross-sectional regressions of statewide BIL claims frequency rates on variables representing state economic, demographic, and legal characteristics that affect the marginal costs and benefits of tiling claims. As an indicator of moral hazard we use survey data on consumer attitudes toward various types of dishonest behavior relating to insurance claims. The results provide strong support for the hypothesis that attitudes toward dishonest behavior are related to BIL claims frequency, and thus provide evidence of significant moral hazard in automobile insurance markets.