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Why is automobile insurance in Philadelphia so damn expensive?

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  • Eric Smith
  • Randall Wright

Abstract

We document and attempt to explain the observation that automobile insurance premiums vary dramatically across local markets. We argue high premiums can be attributed to the large numbers of uninsured motorists in some cities, while at the same time, the uninsured motorists can be attributed to high premiums. We construct a simple noncooperative equilibrium model, where limited liability can generate inefficient equilibria with uninsured drivers and high, yet actuarially fair, premiums. For certain parameterizations, an optimal full insurance equilibrium and inefficient high price equilibria with uninsured drivers exist simultaneously, consistent with the observed price variability across seemingly similar cities.

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File URL: http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=420
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File URL: http://minneapolisfed.org/research/sr/sr139.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 139.

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Date of creation: 1991
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Handle: RePEc:fip:fedmsr:139

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Keywords: Insurance industry ; Philadelphia (Pa.);

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  1. Eric Smith & Randall Wright, 1991. "Why is automobile insurance in Philadelphia so damn expensive?," Staff Report 139, Federal Reserve Bank of Minneapolis.
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