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Rate Regulation and the Industrial Organization of Automobile Insurance

  • Susan J. Suponcic
  • Sharon Tennyson
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    This paper analyzes the impact of rate regulation on the structure of insurance markets for private passenger automobile insurance. The paper argues that states' restrictions on automobile insurers' rates of return will distort the structure of the market by distorting insurers' entry and output decisions. Cross-sectional analysis of the numbers of firms and the relative market shares of firms of different organizational characteristics supports this argument, especially for those states which impose the most stringent regulation. The analysis suggests that increased regulatory stringency lowers the total number of firms selling in the market, and lowers the number of low cost and national firms in the market. The market shares of these latter two groups of firms are also significantly lowered by increased regulatory stringency. These findings hold even after controlling for other factors which may influence the relative prevalence of these firms in the market, and are robust to the assumption that regulatory stringency in a state is itself partially determined by the number and market shares of large, low cost producers.

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    File URL: http://www.nber.org/papers/w5275.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5275.

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    Date of creation: Sep 1995
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    Publication status: published as Rate Regulation and the Industrial Organization of Automobile Insurance , Susan J. Suponcic, Sharon Tennyson. in The Economics of Property-Casualty Insurance , Bradford. 1998
    Handle: RePEc:nbr:nberwo:5275
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. J. David Cummins & Sharon Tennyson, 1992. "Controlling Automobile Insurance Costs," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 95-115, Spring.
    2. Mayers, David & Smith, Clifford W, Jr, 1988. "Ownership Structure across Lines of Property-Casualty Insurance," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 351-78, October.
    3. Ippolito, Richard A, 1979. "The Effects of Price Regulation in the Automobile Insurance Industry," Journal of Law and Economics, University of Chicago Press, vol. 22(1), pages 55-89, April.
    4. Marvel, Howard P, 1982. "Exclusive Dealing," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 1-25, April.
    5. Paul L. Joskow, 1973. "Cartels, Competition and Regulation in the Property-Liability Insurance Industry," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 375-427, Autumn.
    6. Frech, H E, III & Samprone, Joseph C, Jr, 1980. "The Welfare Loss of Excess Nonprice Competition: The Case of Property-Liability Insurance Regulation," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 429-40, October.
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