Mispriced Equity: Regulated Rates for Auto Insurance in Massachusetts
From the Santa Monica Freeway to the New Jersey Turnpike, drivers are unhappy about the cost of automobile insurance and are asking government to do something about it. California voters approved Proposition 103 in 1988; it requires that all rates be approved by the state insurance commissioner, attempts to reduce rates by 20 percent, and dramatically limits the criteria that can be used to rate drivers for premium purposes. New Jersey enacted an insurance reform law that seeks to charge insurers for a deficit-burdened state underwriting pool and prohibits the use of age, sex, and marital status in rating drivers for premiums. Other states enacting or considering significant rate rollbacks or reform since 1988 include Arizona, Florida, Michigan, Nevada, and Pennsylvania. This article describes the current consequences of similar policies adopted in Massachusetts more than a decade ago. The experience suggests that recent moves by other states in the same direction will ultimately prove quite expensive as the proportion of high-cost drivers increases and as insurers lose the incentive to write policies and control costs. The trend away from insurance premiums based on expected cost also reduces incentive effects for drivers, since insurance premiums provide a link between tort judgments and consumer decisions.
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