The Impact of Rate Regulation on Claims: Evidence from Massachusetts Automobile Insurance

27 Pages Posted: 9 Apr 2012

See all articles by Richard A. Derrig

Richard A. Derrig

affiliation not provided to SSRN

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM)

Multiple version iconThere are 2 versions of this paper

Date Written: Fall 2011

Abstract

The article tests the hypothesis that insurance price subsidies created by rate regulation lead to higher insurance cost growth. The article makes use of data from the Massachusetts private passenger automobile insurance market, where cross‐subsidies were explicitly built into the rate structure through rules that limit rate differentials and differences in rate increases across driver rating categories. Two approaches are taken to study the potential loss cost reaction to the Massachusetts cross‐subsidies. The first approach compares Massachusetts with all other states while controlling for demographic, regulatory, and liability coverage levels. Loss cost levels that were about 29 percent above the expected level are found for Massachusetts during years 1978–1998, when premiums charged were those fixed by the state and included explicit subsidies for high‐risk drivers. A second approach considers changing cost levels across Massachusetts by studying loss cost changes by town and relating those changes to subsidy providers and subsidy receivers. Subsidy data based on accident year data for 1993–2004 show a significant and positive (relative) growth in loss costs and an increasing proportion of high‐risk drivers for towns that were subsidy receivers, in line with the theory of underlying incentives for adverse selection and moral hazard.

Suggested Citation

Derrig, Richard A. and Tennyson, Sharon L., The Impact of Rate Regulation on Claims: Evidence from Massachusetts Automobile Insurance (Fall 2011). Risk Management and Insurance Review, Vol. 14, Issue 2, pp. 173-199, 2011. Available at SSRN: https://ssrn.com/abstract=2036922 or http://dx.doi.org/10.1111/j.1540-6296.2011.01206.x

Richard A. Derrig (Contact Author)

affiliation not provided to SSRN

No Address Available

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

252 MVR Hall
Ithaca, NY 14853
United States
607-255-2619 (Phone)
607-255-4071 (Fax)

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