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Efficiency Consequences of Rate Regulation in Insurance Markets

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  • Sharon Tennyson

Abstract

Despite the presence of many and diverse sellers of insurance in most markets, insurance prices in some markets remain subject to regulation by state governments. Insurance rate regulation has a long and storied history in this country and the reasons for its continued existence are subject to debate and interpretation. This paper critically examines the arguments for rate regulation and discusses the consequences of this regulation for the insurance marketplace. It first provides a brief overview of the history, scope and objectives of insurance rate regulation, examines the most prevalent justifications for rate regulation and argues that they are incorrect or incomplete. It then turns to the consequences of rate regulation for insurance market outcomes making use of both economic theory and empirical evidence from academic studies of regulated insurance markets. The paper concludes that insurance rate regulation entails high costs for society and for insurance consumers, and that alternative policies for meeting regulatory objectives should be considered.

Suggested Citation

  • Sharon Tennyson, 2007. "Efficiency Consequences of Rate Regulation in Insurance Markets," NFI Policy Briefs 2007-PB-03, Indiana State University, Scott College of Business, Networks Financial Institute.
  • Handle: RePEc:nfi:nfipbs:2007-pb-03
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    File URL: http://www.indstate.edu/business/sites/business.indstate.edu/files/Docs/2007-PB-03_Tennyson.pdf
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    References listed on IDEAS

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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. Keeton, William R & Kwerel, Evan, 1984. "Externalities in Automobile Insurance and the Underinsured Driver Problem," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 149-179, April.
    3. Harrington, Scott E & Danzon, Patricia M, 2000. "Rate Regulation, Safety Incentives, and Loss Growth in Workers' Compensation Insurance," The Journal of Business, University of Chicago Press, vol. 73(4), pages 569-595, October.
    4. Blackmon, B Glenn, Jr & Zeckhauser, Richard, 1991. "Mispriced Equity: Regulated Rates for Auto Insurance in Massachusetts," American Economic Review, American Economic Association, vol. 81(2), pages 65-69, May.
    5. Bond, Eric W & Crocker, Keith J, 1991. "Smoking, Skydiving, and Knitting: The Endogenous Categorization of Risks in Insurance Markets with Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 177-200, February.
    6. Boyer, Marcel & Dionne, Georges, 1989. "An Empirical Analysis of Moral Hazard and Experience Rating," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 128-134, February.
    7. Smith, Eric & Wright, Randall, 1992. "Why Is Automobile Insurance in Philadelphia So Damn Expensive?," American Economic Review, American Economic Association, vol. 82(4), pages 756-772, September.
    8. Barkume, Anthony J & Ruser, John W, 2001. "Deregulating Property-Casualty Insurance Pricing: The Case of Workers' Compensation," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 37-63, April.
    9. 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.
    10. Dahlby, B. G., 1983. "Adverse selection and statistical discrimination : An analysis of Canadian automobile insurance," Journal of Public Economics, Elsevier, vol. 20(1), pages 121-130, February.
    11. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
    12. Danzon, Patricia M & Harrington, Scott E, 2001. "Worker's Compensation Rate Regulation: How Price Controls Increase Costs," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 1-36, April.
    13. Cummins, J David & Tennyson, Sharon, 1996. "Moral Hazard in Insurance Claiming: Evidence from Automobile Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(1), pages 29-50, January.
    14. Ilayperuma Simon, Kosali, 2005. "Adverse selection in health insurance markets? Evidence from state small-group health insurance reforms," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1865-1877, September.
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    Cited by:

    1. Martin F. Grace, 2009. "A Reexamination of Federal Regulation of the Insurance Industry," NFI Policy Briefs 2009-PB-02, Indiana State University, Scott College of Business, Networks Financial Institute.

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    Keywords

    insurance; rate regulation;

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