The economic effects of regulated automobile insurance rates

Most models concerning automobile insurance regulations lack the ability to empirically determine the relation between regulated and competitive insurance prices. The model developed in this study, by introducing a regulated profit constraint on the objective function of the firm overcomes the deficiencies of previous models by specifying a testable model of the relation between regulated and competitive prices in the automobile insurance industry. From the model, two propositions are set forth: (1) price for a given level of risk is greater in regulated states than in the competitive states, and (2) the marginal production cost is greater for a given level of risk in the regulated states than in the competitive states. Using premium and cost data supplied by the Insurance Service Office, the two propositions are empirically tested. The results of the empirical test support the two propositions