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

摘要

This study points out a potential unintended effect of efforts to enhanceaffordability of insurance prices by regulating rates: It may ultimately lead tohigher insurance costs. This is because rate regulation that suppresses insuranceprices below competitive levels, or provides significant premium subsidies forsome consumers, creates a variety of incentive distortions in the market. Thearticle summarizes the theoretical arguments for this effect and provides empiricalevidence of cost-increasing effects of rate regulation. The analysis uses state-leveldata on automobile insurance costs and claims rates for the period 1990 through1998, and employs empirical methods that control for the possible reversecausation of high insurance costs leading to consumer demand for rate regulation.We find that bodily injury and property damage liability loss costs are higher inrate-regulated states, and that the bodily injury to property damage liability claimsratio is higher in regulated states.