Price and Availability Tradeoffs of Automobile Insurance Regulation
Early analyses of automobile insurance regulation and deregulation efforts have yielded mixed results, in part because of the small number of completed deregulation experiments. This analysis focuses on a 30-state sample from 1974 through 1981 and on the experience in 11 deregulated states. Overall, regulation decreases the unit price (i.e., inverse loss ratio), but the effect is disproportionately concentrated in a small number of heavily regulated states. For these states, insurance regulation increased the size of the involuntary market by an average of 17 percent. Substantial subsidies to drivers in the involuntary market where found, possibly as great as $292 per year in Massachusetts. The states that undertook deregulation over the past two decades experienced reduced unit prices and decreases in the size of the involuntary market.
The automobile insurance industry has long been one of the principal targets of rate regulation efforts. To avoid the antitrust violations that would arise from price fixing through insurance rating bureaus, the McCarren-Ferguson Act of 1945 granted the insurance industry an antitrust exemption if it were regulated by state law.(1) Extensive insurance rate regulation followed in all states within the next five years.
Since the late 1960s there has been a gradual movement toward deregulation consistent with the trend toward deregulation in several other industries. At present, states vary greatly in the degree of automobile insurance rate regulation. At one extreme, some states require prior approval of all rates or mandate bureau rates for all insureds (for example, Massachusetts, New Jersey, and North Carolina). At the other end of the spectrum, some states have had no rate regulation for the past 15 years or longer (for example, California and Illinois).
(1)59 Stat. 33, codified at 15 U.S.C. 1011-1015 (1976).
The 1988 referendum in which California voters chose to impose price decreases on automobile insurance rates may signal a return to a more aggressive regulatory era. From an external vantage point it appears that this vote to increase regulatory controls may have been driven by a perception of an economic free lunch--a drop in insurance prices with no loss in coverage. Whether regulation yields such costless dividends is the main subject of this article.
Our statistical analysis of the recent experiences of regulated versus unregulated states addresses the following questions: does regulation result in higher or lower insurance rates? If rates are lower, what has been the effect on the availability of insurance in these states? Furthermore, what has been the experience of those states that have deregulated their automobile insurance rates? What do comparisons of the pre- and post-regulatory experiences for these states imply regarding the above questions?
These are interesting issues given the developments in automobile insurance and other regulated industries over the past decade and a half. In particular, automobile insurance rates have been deregulated completely in several states. Furthermore, the insurance industry, which was traditionally viewed as a strong beneficiary of regulation through the maintenance of bureau rates and other cartel-like practices, has become a strong advocate of deregulation in those states where regulation has persisted. This latter fact may be a signal that automobile regulation has shifted over time from being price-increasing to price-restraining in nature. Paul Joskow found evidence of such a shift in regulatory behavior for electric utilities during the seventies. Recent studies of automobile insurance are consistent with the price-restraining hypothesis, but the evidence is far from conclusive.
The econometric analysis undertaken in this article relies on insurance rate and availability data that have been assembled from insurance industry source documents by Best Insurance Service and the Automobile Insurance Plans Service. …