An Analysis of the Determinants of the Demand for Automobile Insurance

Abstract

This article examines the effect of price, income, and perceived risk on the demand for three major automobile insurance coverages: bodily injury, comprehensive, and collision. The research approach involved a cross-sectional analysis of insurance consumption patterns in the 359 towns and cities in the state of Massachusetts in 1979. The major findings were that the demand for the three coverages was generally inelastic with respect to price and income, that the demand for comprehensive and collision coverages was price-elastic at prices 1.6 times the state average price, and that the demand for comprehensive and collision coverages increased substantially from areas of low density to areas of moderate density. In the absence of other means of transportation, the automobile is a virtual necessity for many people. Given the strong dependency on cars and the substantial risks associated with owning and operating one, the purchase of automobile insurance is an important consumer decision, the significance of which is amplified by the high cost of insurance. In terms of single expenditures, automobile insurance ranks high among consumer goods and services, and overall it absorbs nearly 2 percent of consumers' disposable incomes [ I]. The high cost of automobile insurance, combined with the recent sharp rise in rates, has generated considerable controversy over the regulation of automobile insurance. Of particular significance are the current theoretical arguments advocating alternative methods for setting overall insurance rates and the rates for particular classes of drivers [5, 10, 14, 15, 17]. Fundamental to these arguments are key assumptions regarding consumers' utility and demand for automobile insurance. But despite considerable research on the demand for a wide variety of goods and services, surprisingly little research has been published on the determinants of the demand for automobile insurance. This article attempts to bridge this gap in insurance research by assessing some of the major factors affecting the demand for automobile insurance