The Effects of Regulated Premium Subsidies on Insurance charges Essay


Weiss, Mary A.; Tennyson, Sharon; Regan, Laureen

Diary of Risk and Insurance,  September you, 2010, Vol. 77, Number 3, 597 – 624.



Marking Structure

|Component |Weight (%) |Marks Awarded | |Imagination and innovation |10 | | |Summary of main concept |15 | | |Critical evaluation |30 | | |Implications |20 | | |Research |15 | | |Presentation |10 | | |Total |100 |

Summary of Main Concept

This article is mainly regarding having the express regulation of rates as a means for making automobileВ insuranceВ more affordable to consumers by restricting insurer earnings and pricing practices. Bonus distortions arising from this type of charge regulation might lead to higher incident rates and higherВ insuranceВ lossВ costs. Particularly, regulators have an interest in auto insurance rates that are satisfactory, so that insurance is readily accessible in the market, although not so high that insurance is unaffordable to drivers.

Automobile insurance can be described as compulsory purchase for most motorists in the United States to represent a significant expenditure for many. Partly because of this, many states control automobile insurance prices. Regulators might intervene in automobile insurance markets to reduce superior levels to get high-risk motorists, to limit average level increases for any drivers, and/or to reduce high quality variation around drivers. 1 widespread mechanism involves curbing insurance premiums for the highest risk drivers and financing these kinds of lower rates through surcharges to low-risk drivers. This leads to high-risk motorists paying fewer, and low-risk drivers spending more, than they would within purely cost-based pricing program.

For the extent that they will be present in a market, some effects to driver incentives which have been created simply by regulated insurance pricing will have the effect of accelerating the anticipated costs of insurance in accordance with a cost-based system of prices. For example , if perhaps high-risk drivers' premiums tend not to reflect their higher expected accident costs, they may be anticipated to drive more and to purchase more insurance coverage (Blackmon and Zeckhauser, 1991; Harrington and Doerpinghaus, 1993). Likewise, because low-risk drivers pay relatively more for insurance they may drive less and perhaps choose lower insurance limitations. In combination, these types of changes to insuring and traveling decisions will lead to an insurance pool area in which high-risk drivers are usually more heavily symbolized and thus to higher average insurance charges.

This content also applied a -panel of gross annual state-level data on auto insurance markets to look at whether damaging insurance prices through price regulation includes a significant impact on automobile insurance reduction costs and claim regularity. Insurance assert frequency can be examined furthermore to loss costs because some of the bonus distortions hypothesized to be produced by level...

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