Rate Regulation and the Industrial Organization of Automobile Insurance

45 Pages Posted: 14 Jul 2000 Last revised: 19 Jul 2000

See all articles by Susan J. Suponcic

Susan J. Suponcic

Johnson & Johnson

Sharon L. Tennyson

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

Date Written: September 1995

Abstract

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.

Suggested Citation

Suponcic, Susan J. and Tennyson, Sharon L., Rate Regulation and the Industrial Organization of Automobile Insurance (September 1995). NBER Working Paper No. w5275, Available at SSRN: https://ssrn.com/abstract=225339

Susan J. Suponcic

Johnson & Johnson

New Brunswick, NJ 08933
United States

Sharon L. Tennyson (Contact Author)

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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