Price Subsidies and the Demand for Automobile Insurance
20 Pages Posted: 18 Mar 2021
Date Written: March 17, 2021
This paper tests for regulation-induced adverse selection in the Massachusetts automobile insurance market during the regulated period 1990-2005. The paper demonstrates the application of the Poterba-Finkelstein (2014) unused-observables test for adverse selection in a regulated insurance market using group-level panel data. Differences between rates that incorporate state-mandated restrictions and those based on actuarial estimates provide data on the unused-observables needed for the test. Consistent with regulation-induced adverse selection, unused observables are statistically significant and positive in estimated models of both insurance purchases and loss costs. Robustness checks support the inference that higher-risk drivers account for the results.
Keywords: Adverse Selection, Unused-observable test, Insurance Regulation
JEL Classification: G22, G28
Suggested Citation: Suggested Citation