Efficiency Consequences of Rate Regulation in Insurance Markets

Networks Financial Institute Policy Brief No. 2007-PB-03

27 Pages Posted: 14 May 2007

See all articles by Sharon L. Tennyson

Sharon L. Tennyson

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

Date Written: March 2007

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.

Keywords: insurance, rate regulation

Suggested Citation

Tennyson, Sharon L., Efficiency Consequences of Rate Regulation in Insurance Markets (March 2007). Networks Financial Institute Policy Brief No. 2007-PB-03, Available at SSRN: https://ssrn.com/abstract=985578 or http://dx.doi.org/10.2139/ssrn.985578

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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