The Economics of Property-Casualty Insurance
Smith, Barry D., Journal of Risk and Insurance
The Economics of Property-Casualty Insurance, edited by David F. Bradford, 1998, University of Chicago Press
This book is a collection of six papers published as a project report by the National Bureau of Economic Research. Its editor, David F. Bradford, states in the introduction that there has been "little attention paid" to the study of insurance by the economics profession. The National Bureau of Economic Research undertook this study "in the hope of expanding the network of economists who work on insurance and the stock of empirical knowledge useful to those who develop policies related to the industry." These statements immediately raised concerns for this reviewer. The insurance industry has many unique and peculiar features that must be clearly understood by "outsiders" before useful analysis can be performed, even by "outsiders" with strong economic, financial, or statistical backgrounds. In many cases, traditional analysis performed in other economic arenas must be modified to properly fit the propertycasualty industry before meaningful results can be developed. For the majority of the six papers included in this collection, my fears were not realized. Unfortunately, the first two papers were fraught with significant problems.
The final paper in the collection, by Born, Gentry, Viscusi, and Zeckhauser, is an interesting analysis of organizational form (stock versus mutual) and company performance. The existence of both mutual and stock insurance companies in the property-casualty insurance industry creates many interesting questions. This paper is especially useful in providing background material on the development of both forms of ownership and the strengths and weaknesses of each. Analysis of firm performance based on form of ownership is always difficult because many different factors (other than stock versus mutual) must be considered in the analysis. This article presents an enlightening argument that stock insurance companies appear to react more swiftly to changes in the level of profitability in their environment. Overall, however, the authors tend to conclude what many observers of the industry feel is true, that there is relatively little difference between the performance of stock and mutual companies.
The fifth paper, by Bohn and Hall, is the most interesting one included in this collection. It takes a unique look at insurance company insolvencies. Instead of attempting to predict insolvencies, or the factors leading to insolvencies, this paper looks at the costs associated with liquidating an insolvent insurance company and the timing of the payments made to claimants once liquidation begins. These issues have not been analyzed in this way, and the large costs identified by the authors should lead to additional research.
The fourth article, by Suponcic and Tennyson, analyzes rate regulation and its effect on the automobile insurance market. This is another in a series of important articles on this subject, and this paper adds to the literature by analyzing the effect of what is termed "stringent" regulation. "Stringent" regulation is defined to have occurred in the five states where at least twenty percent of drivers were insured in residual auto insurance markets throughout the eighties. Although the paper has other interesting results, the effect of "stringent" regulation is the most enlightening.
The third article, by Jaffee and Russell, presents an interesting look at auto insurance regulation and deals with traditional economic concepts such as distributional equity, welfare enhancement, and regulatory intervention and fairness. The most interesting part of this paper is its analysis of Proposition 103 and why, in general, insurance companies face consumer-based regulatory movements. Although this analysis is interesting, the final conclusions of the paper are fairly simplistic, such as "we have found evidence of a positive relationship between insurance premiums and the number of uninsured drivers. …