Studies on Effects of Insurance Rate Regulatory Structures

Insurance Regulatory Structure and Direct Car Insurance

There has been considerable study of the effects of the various rate regulatory systems on the price of direct car insurance and the value which accrues to policyholders. Most of these studies have been performed by government agencies and independent scholars.

A large body of empirical work has addressed the question of whether regulatory lag has an impact on the balance issue— maintaining a balance between the need to ensure insurer solvency on the one hand and the responsibility to ensure consumers are treated fairly on the other. Among these studies, the New York Insurance Department (1969) found that regulatory delay tends to cause price increases to lag behind increases in loss costs when costs are increasing, and to cause price decreases to lag behind decreases in loss costs during periods when costs are falling. However, this study assumed that long-run prices will be equal under either competitive systems or prior approval, a conclusion supported by later research.

Perhaps the most extensive study to date of the issue is found in an August 1986 report to Congress by the Government Accounting Office. The purpose of the report is to compare how open competition and prior approval rate regulation affect the cost and availability of auto insurance to consumers. The GAO used two measures of automobile insurance costs, average inflation-adjusted premiums and average premiums per dollar of losses, for the period 1975-1983.

Are Car Insurance Premiums Lower in Competitive States?

The report found that for physical damage coverage premiums were significantly lower in competitive rating states. Overall, liability premiums tended to be somewhat higher in competitive rating states, according to the study. However, the study found that the higher rates in competitive states reflected factors other than rate regulation. Indeed, even in the liability area, when all the other variables that may influence premiums were taken into account through regression analysis (see table p. 98, in GAO study) GAO data show that liability coverage premiums were only 5 percent lower in prior approval states.

Of note, with liability coverage, especially in states where it is compulsory, the political process acts to keep prices for basic coverage low, sometimes so low that insurers are denied an adequate profit, or any profit at all. But there is less political interest in property insurance since property coverages are not required by law and generally are purchased only for vehicles with a high book value—many people drop collision and comprehensive once a car begins to show its age. (Property coverages—collision and comprehensive—are usually required by lenders, however.)

A further weakness of the GAO study is that it took no account of how different regulatory schemes were implemented. A file and use system can be implemented by a regulator in a fashion that resembles the most rigorous of prior approval systems.

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