Automobile Insurance Market Research Articles

Adverse Selection, Private Information, and Lowballing in Insurance Markets

Recent contributions to the adverse selection literature have focused on a multiperiod competitive environment. In this setting a clean distinction arises between the predictions of competing models. Cooper and Hayes extend the model of Rothschild and Stiglitz to multiple periods. The result is a self-selecting equilibrium characterized by price highballing, or systematically overcharging new business. Kunreuther and Pauly suggest that information asymmetries between competing insurance firms render such price-quantity policies infeasible. Their model results in a pooling equilibrium that is characterized by price lowballing, or systematically undercharging new business. Our evidence is consistent with the Kunreuther and Pauly model and reveals the persistence of adverse selection in the automobile insurance market. Copyright 1990 by the University of Chicago.

The Economics of Insurance Regulation: A Cross-National Study

Preface - Notes on the Contributors - Introduction J.Finsinger and M.V.Pauly - GREAT BRITAIN - Regulation of the UK Insurance Industry J.Tapp - UNITED STATES OF AMERICA - Regulation and Quality Competition in the US Insurance Industry M.Pauly, H.Kunreuther and P.Kleindorfer - GERMANY - A State Controlled Market: The German Case J.Finsinger - SWEDEN - The Regulation of the Swedish Insurance Industry K.Skogh - SWITZERLAND - Insurance Regulation in Switzerland: An Outline with Special Reference to Life and Motor Car Liability Insurance C.B.Blankart and F.Schneider - Regulation Induced Price Instability in Swiss Motor Car Liability Insurance C.B.Blankart and J.Finsinger - FRANCE - The French Automobile and Life Insurance Markets J.Finsinger and R.Waldmann - The French Insurance Market J-F.Outreville - CANADA - The Economics of Life Insurance Regulation G.F.Mathewson and R.A.Winter - Descriptive Evidence on the Canadian Insurance Industry G.F.Mathewson and R.A.Winter - Index

Price Dispersion in an Automobile Insurance Market

From automobile insurance data for Alberta over the period 1974-81, we find thatpremiums are highly correlated across driver classes in a given year, but that premiums for a given driver class are not correlated over a period of more than 5 years. Firms' relative market shares among drivers over age 25 and married males under 25 are inversely related to their deviations from the mean premiums.In these driver classes, the variance of real premiums decreases with the numberof firms in the market and increases with the real loss cost per car insured and the number of cars insured. From these results we conclude that the price dispersion in automobile insurance in Alberta is based on costly consumer search.

First-Year Cost Results under No-Fault Automobile Insurance: A Comparison of the Florida and Massachusetts Experience

In the early summer of 1973, insurers representing about 65 percent of the Florida private passenger automobile insurance market co-operated in supplying incurred accident-year experience for 1971 and 1972 to provide a basis for measuring probable first-year cost results in Florida under no-fault. Insurers differed, and sometimes substantially, in their reported results. But a summary of all submissions indicates a probable increase in insurer costs at the 15-month development. This is in marked contrast with the Massachusetts experience reported a year ago in the Journal and casts doubt on the present ability of no-fault system designers to balance threshold and benefit accounts without actual market experimentation.

Competitive Rating Laws and Insurer Conduct

This study examines the Chicago automobile insurance market during 1970 to determine the effect of the Illinois competitive rating law on insurer conduct. A set of requisites to workable is set forth and the market examined within this framework. While the criteria for workable include a necessary condition of enough independent supplying units, emphasis is placed on the sufficiency condition of competitive conduct. The review of conduct includes pricing, product innovation, and distribution efficiency. Information on insurer conduct was obtained from data on at the Illinois Department of Insurance and from the responses of insurers and Chicago agents to a mailed questionnaire. The study concludes that insurer conduct was compatible with the legislative target of a long run improvement in propertyliability insurance availability. Responding to numerous complaints as to the difficulties of obtaining automobile insurance in several areas of Illinois (particularly in Chicago), the Illinois Department of Insurance in mid-1969 recommended to the Illinois legislature the adoption of a competitive rating law. Acting on the Department's contention that such a rating law would lead to a long run improvement in property-liability insurance availability, the legislature passed into law as of January 1, 1970, an open competition rating law.1 The Illinois law David R. Klock, Ph.D., is Assistant Professor of Finance and Insurance in Virginia Polytechnic Institute and State University. During the summers of 1970 and 1971, Dr. Klock held a research Fellowship with the Department of Insurance of the State of Illinois. The author wishes to acknowledge the assistance of the Illinois Department of Insurance; the guidance of University of Illinois thesis advisors Robert I. Mehr, Richard J. Arnould, and Dwight P. Flanders; and the helpful comments of William Ghee of Virginia Polytechnic Institute and State University. This paper was submitted in October, 1971. '-The term file for informational purposes would best describe the Illinois law. Within thirty days of using a new rate, the insurer would was scheduled to terminate in August, 1971. The legislative intent was to provide the Department of Insurance with a period of time to evaluate any effects of open competition and to determine prior to August, 1971, whether the law should be continued. The purpose of this study is to examine insurer conduct during the first year (1970) of the foregoing Illinois competitive rating law. Furthermore, the study attempts to devise a methodology which could assist insurance regulators in their task of observing and evaluating the activities of property-liability insurers.2 Insurer conduct is evaluated within the framework of the legislative dictates of Article XXX? of the 1970 Illinois Insurance Code. While the Illinois competitive rating law retained the requirements of with the Illinois Insurance Department the percentage price change and the premium volume affected by the price change. 2 Thus the proposed methodology is influenced by the following criteria: that regulators understand and are capable of implementing effectively the suggested research system.

Price Variability in the Automobile Insurance Market

Price Variability in the Automobile Insurance Market

Refinement of Automobile Rate and Underwriting Classes

This paper discusses some of the rating concepts that have been incorporated into many automobile insurance rate schedules in recent years. Whether these should properly be classed as refinements is a matter of opinion, depending to a considerable extent on the arrangement of the prejudices of the individual assigning the terminology. Up until about four years ago, substantially all insurers used relatively simple rating plans that in all essential respects were alike. To be sure, there were minor variations in rating treatment among insurers, designed to attract or repel certain risk groups, but by and large each rating plan centered around a single dominant rating element. There were a few rating plans incorporating two or more major rating elements but these were generally judged to be too complex for economical administration. Two developments triggered a change to the attitude which prevails today: (1) the creation of data processing equipment with a capacity to handle many combinations of factors expeditiously and (2) an announced determination by some groups of insurers to capture a larger share of the available automobile insurance market. To accomplish this, they felt it would be necessary to introduce rating plans at

Automobile Insurance: Canadian Accident-Free Classification System

The precise wording of the heading is deliberate. The Canadian system is not a “bonus” nor is it properly described as “no claim”; it is a sub-classification of insureds according to whether they have been accident-free during a term of years ending at the inception of the insurance period. Specific rates are quoted in the Tariff for each sub-class, based broadly on the relative experiences; as a matter of arithmetical convenience, premium rates are calculated by applying discounts or surcharges to a “key” rate, but the percentage discounts or surcharges are not quoted in the Tariff, the Policy or the renewal papers.In the early 1930's a “no claim bonus” on British lines was part of the Canadian automobile insurance system. A percentage reduction or “bonus” was allowed from the premium specified in the Policy, provided the insured had owned and operated a private passenger car, free of accident or revocation of driving license, for a period of up to three years before the inception of the Policy. At that time the Automobile Insurance Market was profitable and highly competitive, both as between Companies and as between Agents. Because of inter-Company competition, confirmation of entitlement to the bonus was rarely attempted. Often it was not possible, as most Companies did not maintain an alphabetical index of insureds; an effort to set up an inter-Company claim-recording bureau broke down through sheer weight of numbers of claims.