NCPA - National Center for Policy Analysis

Auto Insurance Deregulation

May 18, 2001

Despite the trend toward deregulation, almost all the states still regulate auto liability insurance through capital requirements, price controls, and restrictions on market entry and exit. Experts say consumers ultimately bear the burden of the economic inefficiencies created by regulation -- through increased premiums, limited choice and lower quality. Currently, consumers spend about $120 billion annually on premiums.

In a deregulated market, auto insurance prices reflect the expected costs of motor vehicle accidents as well as a profit for insurers, reflecting the risk they bear. In contrast, according to researchers:

  • Price regulation usually results in low-cost drivers paying higher rates to subsidize high-cost drivers.
  • Premium price changes are less frequent and larger than in competitive states, and the uncertainty of future regulated rates makes insurers less likely to lower rates if their costs go down.
  • Uncertainty about whether they will be allowed to change premiums in the future increases insurers' financial risk and thus raises their cost of borrowing.

"Rate suppression," when regulators do not allow insurers to charge market prices, limits consumer choice and reduces product quality.

  • For example, numerous insurers have withdrawn from the heavily regulated markets in Massachusetts and New Jersey.
  • In contrast, the number of insurers nearly doubled following the 1997 deregulation in South Carolina.

Auto insurance prices are currently regulated in 49 states -- in 31 states, rates must be approved by state regulators before they can be implemented; in the others, insurers can change prices without prior approval, but regulators can set them aside later. Only Illinois does not give regulators a veto over premium rates.

Illinois has been deregulated for about 30 years, and South Carolina began to deregulate in 1997.

Source: J. David Cummins (University of Pennsylvania), "Property-Liability Insurance Price Deregulation: The Last Bastion?" Conference Summary, April 2001; based on "Deregulating Property-Liability Insurance: Restoring Competition and Increasing Market Efficiency," American Enterprise Institute-Brookings Institution Joint Center for Regulatory Studies, 2001 (forthcoming).


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