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

Richard A. Derrig and Sharon Tennyson

Risk Management and Insurance Review, 2011, vol. 14, issue 2, 173-199

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.

Date: 2011
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https://doi.org/10.1111/j.1540-6296.2011.01206.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:rmgtin:v:14:y:2011:i:2:p:173-199

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