Deregulation, competition, and consumer choice of insurer: Evidence from liberalization reform in China’s automobile insurance market

In 2015, the China Insurance Regulatory Commission initiated a liberalization reform in the automobile insurance industry to grant insurers more discretion in policy design, underwriting, and ratemaking. The deregulation intended to increase competition and choices for the consumer, yet there was little scientific evidence on how the insurance market responded to the reform. This article examines the effectiveness of this deregulation reform in China. Leveraging a large industry dataset of more than 7 million automobile insurance policies from 63 major automobile insurers operating in China, we study policyholders’ switching behavior among insurance providers. To better understand the heterogeneity in the impact of deregulation on market performance and consumer choice, we further analyze the switching pattern among different types of insurers according to the insurer's size, the company’s business structure, the jurisdiction’s market power, and the customer’s risk type. Overall, the empirical results suggest that the reform has met its original goal, leading to higher market competition, and more diversified consumer choices. We further confirm that the average premium dropped significantly after the reform for all three jurisdictions implementing the reform, yet the insurers’ pricing strategy was risk type dependent, i.e., the average premium for the high-risk customers increased, while the average premium for the low-risk customers decreased substantially.