The Effects of Regulated Premium Subsidies on Insurance Costs: An Empirical Analysis of Automobile Insurance

Abstract

State regulation of rates is sometimes used as a means to make automobile insurance more affordable to consumers by restricting insurer profits and pricing practices. Incentive distortions arising from this type of rate regulation might lead to higher accident rates and higher insurance loss costs. Annual state-level panel data for the time period 1980-1998 are used to investigate these effects, using empirical methods that recognize the endogenous determination of states' regulatory choices. Results suggest that rate regulation that systematically suppresses (some or all) drivers' insurance premiums is associated with significantly higher average loss costs and higher insurance claim frequency.

Deciding Whether to Invest in Mitigation Measures: Evidence From Florida

“…29 29 To the extent that insurance rates are regulated below their actuarially fair level (e.g., Weiss, Tennyson, and Regan, 2010), such a circumstance would reduce the likelihood of observing a substitution effect, since the need to choose between insurance or mitigation (as opposed to both) may be somewhat lessened (i.e., homeowners would be better able to choose a lower deductible and still engage in at least some mitigation). Florida is an example of a catastrophe insurance market subject to strict rate regulation and varying degrees of insurance rate subsidization geographically, and this will ultimately reduce the likelihood of mitigating (Kunreuther and Michel‐Kerjan, 2009).…”

“…To the extent that insurance rates are regulated below their actuarially fair level (e.g.,Weiss, Tennyson, and Regan, 2010), such a circumstance would reduce the likelihood of observing a…”

How Cellphone Bans Affect Automobile Insurance Markets

“…In addition, Heaton () provides evidence that automobile insurance expenditures fall when no‐fault laws are repealed. In a similar vein, Weiss, Tennyson, and Regan () find evidence that certain insurance rate regulations lead to increases in automobile insurance loss costs and claims frequency.…”

Incentive Effects of Community Rating in Insurance Markets: Evidence from Massachusetts Automobile Insurance

“…Under a pure community rating system insurers are required to charge the same premium to 1 At least 40 states have introduced community rating restrictions for individual or small group health insurance in the 1990s (Monheit and Steinberg Schone, 2004;Kapur, 2004). Weiss et al (2010) find that 21 states restrict the use of rating factors in automobile insurance, and 10 states restrict relative rates across driver classes or territories.…”