Cartels, competition and regulation in the property-liability insurance industry

Abstract

This paper provides a detailed study of the structure, behavior, and performance of the property and liability insurance industry in the United States. The property insurance industry is shown to possess all of the structural characteristics normally associated with competitive markets. Despite a competitive market structure, however, the property-liability insurance industry has traditionally set prices through cartel-like rating bureaus and has been subjected to pervasive state rate regulation. The study concludes that the combination of state regulation, cartel pricing, and other legal peculiarities has resulted in the use of an inefficient sales technique, supply shortages, and overcapitalization. Free entry, however, tends to drive profits toward the cost of capital. Based on recent experience in states where the competitive market is used to determine insurance rates, the study suggests a movement away from rate regulation and cartel pricing to open competition, as a means of eliminating prevailing performance problems.KeywordsEquity CapitalInsurance IndustryStock CompanyDirect WriterLiability InsuranceThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.