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Automobile Insurance Deregulation
Martin F. [email protected]
Richard D. [email protected]
Department of Risk Management and InsuranceRobinson College of Business
Georgia State University
Conclusions
• Georgia not in a crisis• Best time to re-evaluate regulation• Benefits from deregulation exist and have
been demonstrated in other states.– More companies competing– More commitment to the state
• More willing to make fixed-cost investments• More willing to commit capital• Even in times of ‘crisis’
Congressional Testimony of Ernst CsiszarDirector, South Carolina Department of Insurance, April 10, 2003
“For years, neither actuarial methodology nor supply and demand had much to do with automobile insurance ratemaking in South Carolina. Politics drove that ratemaking process within our state. Politically, there was never an opportune time to raise insurance prices. This resulted in significant rate suppression. In the short term, rate suppression kept the costs of insurance down. However, in the longer term, insurers were leaving the market because they were unable to secure an adequate rate for their product. Hence, the level of competition within the market decreased. Rate suppression, as well as frequent legislative changes designed to address short-term ills of one form or another, also sent the wrong signals to the market. These provided incentives to consumers to continue to engage in risky behavior (e.g., speeding), because the insurance premiums they paid were artificially low for some and did not accurately reflect their insurance risk. Consequently, in this system, good-risk drivers were subsidizing the insurance of bad-risk drivers.”
Why Regulate?• Monopoly• High Entry Barriers• Informational Problems
• What do we have in Automobile Insurance?– Monopoly? – Entry Barriers
• Little to none in Georgia– Informational Problems?
• Agents, Internet, A.M. Best
• Georgia has some 367 Private Passenger Auto Insurers in the State. Each has an incentive to sell insurance. There are plenty of agents and internet resources on auto insurance.
• Why regulate what looks like a competitive market?
Two Major Styles of Regulation
• Prior Approval Filing– Insurer seeks regulator’s approval prior to a rate
being implemented.
• Competitive Filing– Insurer can price insurance with few or limited
restrictions.
• Note: There may be a distinction to what the law says and how the regulator behaves.
Actual Rate Regulation Laws
• State made rates • Prior approval with a w/o deemer provision • Prior Approval with a deemer provision
• File and use• Use and file• File only• Flex rating
Gen
eral
ly C
ompe
titiv
eG
ener
ally
Prio
r A
ppro
val
Evidence of the Impact Auto Insurance Regulation
• Overall average impact small– Across all regulated states across time, the average regulate price is close to the
average price in competitive states• Sometimes prices are lower than competitive markets and sometimes prices are higher
than competitive markets. • The most rigorous study found that prior approval rate regulation had little effect on
prices over the period 1970s to the late 1990s.
• However, regulation, on average, causes other significant distortions– Reduced incentives by insurers to invest which leads to
• Reduced competition• More expensive distribution mechanisms• Lower capital contributions
– Reduced choice for consumers– Lower levels of innovation– Greater levels of subsidization of high risk drivers (which increases costs in the
future).– Great political dissatisfaction with auto insurance. It becomes a salient political
issue in a state.
• In addition, in some states, the impact of regulation caused severe distortions
Source: Scott Harrington, Effects of Prior Approval Rate Regulation of Auto Insurance, in (Cummins ed)Deregulating Property-Liability Insurance: Restoring Competition and Increasing Market Efficiency (Brookings Institution, 2002)
Personal Automobile Loss Ratios GA, SC, IL, and US 1985 - 2005
40
50
60
70
80
90
100
110
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Year
Lo
ss R
atio
= L
oss
es In
curr
ed /
Pre
miu
ms US
Georgia
S. Carolina
Illinois
Source: NAIC and author’s calculations
Personal Automobile Insurance Profits GA, SC, IL, and US 1989 - 2005
-25
-20
-15
-10
-5
0
5
10
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Year
Pro
fit
on
Pe
rso
na
l Au
tom
ob
ile In
su
ran
ce
T
ran
sa
cti
on
s
US
Georgia
S. Carolina
Illinois
Source: NAIC Report on Profitability By Line By State
-5.00%
5.00%
15.00%
25.00%
35.00%
45.00%
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Year
% C
ar Y
ears
in
Res
idu
al M
arke
t South Carolina
US
Georgia
Illinois
Personal Automobile Residual Markets GA, SC, IL, and US 1988 - 2004
Source: AIPSO
Number of Personal Automobile Insurers GA, SC, NJ, MA, and IL 1985 - 2005
0
50
100
150
200
250
300
1984 1987 1990 1993 1996 1999 2002 2005
Georgia South Carolina New Jersey Illinois Massachusetts
Source: NAIC and author’s calculations. Includes all insurers writing $100,000 of NPW in personal automobile liability and personal automobile damage insurance.
What Can We Expect From Deregulation?
• More consumer choice
• Lower average prices– Regulated prices can be “high” because firms
can not raise and lower them as needed, so they tend to choose on the high side.
• More commitment to state in hard times
• More product innovation
• Better incentives
South Carolina Regulatory Regime
Provision Pre-Reform
Rates Prior Approval
Risk Classification Restricted
Public Rate Hearings Yes
Limits on Underwriting Restricted
Residual Market Subsidies Yes – Paid by insureds
Compulsory Insurance Yes
Large Subsidies Went to High Risk Drivers
40%
50%
60%
70%
80%
90%
100%
110%
120%
1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748
Lo
ss
Ra
tio
100
120
140
160
180
200
220
240
260
280
300
Av
era
ge
Lo
ss
Co
st
($)
LRAL
Source: South Carolina Department of
Chart shows loss ratio and average loss cost for drivers in the residual market for bodily injury losses from 1993 - 1998
Rate Suppression and Subsidies Reduce Incentives to Control Costs
Jurisdiction 1991 1998 % Increase
South Carolina $615.89 $766.23 24.4%
Average GA, FL and VA $669.48 $749.37 11.9%
Nationwide $685.56 $797.23 16.3%
Table shows average automobile insurance premium in 1991 and 1998 forSouth Carolina, Southeast States, and Nationwide.
South Carolina Today
Provision Pre-Reform Post-Reform
Rates Prior Approval Flex-rating
Risk Classification Restricted Increased
Public Rate Hearings Yes No
Limits on Underwriting Restricted Eased
Residual Market Subsidies Yes – Paid by insureds Yes
Compulsory Insurance Yes No
Sample South Carolina Statistics Post Reform
• Number of automobile insurance companies– 1998 – 88 companies– 2003 – 155 companies
• Size of the residual market– 1998 – 600,000 policies– 2003 – 340 policies
• Eliminated subsidies for risky drivers• According to the National Association of Insurance
Commissioners, average automobile insurance expenditures dropped for SC relative to the nation– 1998 – 24th highest average premium– 2001 – 34th highest average premium
