Incentive Effects of Community Rating in Insurance Markets: Evidence from Massachusetts Automobile Insurance

Sharon Tennyson
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Sharon Tennyson: Department of Policy Analysis and Management, 252 MVR, Cornell University, Ithaca, NY 14853, U.S.A

The Geneva Risk and Insurance Review, 2010, vol. 35, issue 1, 19-46

Abstract: Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The empirical analysis uses 1990–2003 rating cell-level data from the Massachusetts automobile insurance market, in which regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to be significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.

Date: 2010
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