Automobile Insurance
This case includes both conceptual materials on insurance and a
description and assessment of a landmark regulatory decision that set
auto insurance rates in Massachusetts. A series of essays describes
the operation of markets under risk and uncertainty, the purposes of
insurance, and the principles underlying its function. Market failures
that arise when information is not fully shared--namely adverse
selection and moral hazard--are assessed in depth. The Massachusetts
case shows how a sophisticated regulator chose to set insurance rates
when confronted with imperfections in the market for insurance (mainly
due to regulation itself) and a political situation that was highly
sensitive to insurance rates. Most noteworthy was the commissioner's
decision to temper the rate differentials that would be found in an
unregulated market. The case also presents the principal arguments
(and actual testimony) in favor of an alternative, less intrusive
government role in the market. This case may serve at least two
purposes. First, it may be used for teaching about the economics of
uncertainty--the concept of efficient distribution of risk, the market
failures that may result when information is distributed unequally, and
the market for insurance. Second, it may serve as a focus for
discussion of government regulation of consumer products, such as
insurance, telephone service and utilities. In this context, the
automobile insurance case is notable for the very high degree of
analytic sophistication of the regulators and the political
significance of the decision.
Automobile Insurance, 152pp+, (C15-80-550.0);
Automobile Insurance: Teaching Note, 4pp, (C15-80-550.2)
