Market-based approach to auto insurance better than strict regulatory approach: Insurance Research Council

A market-based approach to setting rates in automobile insurance would have long-term positive effects for both insurers and consumers, according to the Insurance Research Council (IRC).

The IRC examined automobile insurance markets in three states — South Carolina (reformed in 1999), New Jersey (reformed in 2004) and Massachusetts (reformed in 2008) — before and after adopting regulatory reforms.

Prior to the enactment of regulatory reforms, each state followed a strict approach to regulating automobile insurance rates and experienced severe stress in their auto insurance markets, an IRC release says.

The study shows that in each state, following the adoption of regulatory reforms:

• Insurance premium expenditures declined relative to previous trends or projections.
• Insurance availability increased or was maintained at previous levels as insurers were encouraged to write more business and enter markets for the first time.
• Insurer underwriting results were maintained or improved to be consistent with regional or national averages.
• Underlying claims rates decreased or remained at pre-reform levels.

“The favourable performance of the more market-based rate-setting introduced in these states provides strong support for the idea that strict government oversight of automobile insurance rate-setting is unnecessary, and may even be detrimental to markets and consumers.”