Does rating regulation affect auto insurance availability?

Great volatility in financial results (as measured by the rate of return on investment) was found in the regulated states: In Massachusetts, profitability ranged from a high of 12.2 percent rate of return to a low of 4.4 percent; in New Jersey, results varied from 29.4 percent to —4.8 percent; and in North Carolina, results varied from 15.6 percent to 4.4 percent. In California, during the same period, the range was from 12.9 percent to 7.2 percent.

Does rating regulation affect auto insurance availability and affordability?

The report notes that “a high degree of rate regulation did not induce either lower or more stable returns to investment in the private passenger automobile market.”

The volatility and inadequacy in some cases of insurer profitability destabilizes capital inflows and outflows and results in volatile premium rates. In addition, with average profitability as high, or higher, in regulated states than average profitability in the open competition state of California, the expectation is that average premium rates would also be as high or higher in the regulated states, thus producing no consumer price benefit from regulation.

The analysis of the comparative residua! market presence in the three highly regulated states showed, as did the GAO study, that regulation appeared to reduce the availability of coverage in the voluntary market. For the period 1980-1985 the residual markets in Massachusetts, New Jersey and North Carolina represented 47.4, 41.7 and 26.4 percent of the total market in those states, respectively.

The comparable figure in California was 3.4 percent. (Again, however, states with compulsory insurance laws are being compared to a state that did not have a compulsory insurance liability law until 1984; the effect of this variable is unknown.) The proportion of motorists for which no insurer was willing to compete was on average roughly 14, 12, and 8 times greater in Massachusetts, New Jersey, and North Carolina, respectively, than in California, despite the best intentions of regulators in those states.

On the other hand, there are other states with a high degree of regulation and a much smaller percentage of drivers who must obtain coverage in the involuntary market—again indicating that factors other than the type of rating regulation affect auto insurance availability and affordability.


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