Auto insurance comparisons
Property liability insurance markets, especially those for personal coverage such as automobile insurance, have traditionally been closely regulated. Areas of government oversight include the imposition of licensing and capital requirements, the monitoring of solvency and liquidation of insolvent firms, and, in some cases, direct regulation of insurance rates. Under the provisions of the McCarran Ferguson Act of 1945, this regulation is undertaken by the individual state governments rather than at the federal level. As a result, the extent of regulatory intervention and enforcement differs across locations.
A primary area of state differences in regulation is the degree to which rates for private passenger automobile insurance are regulated. Just over half of the states intervene directly in the rate making process for automobile insurance. The most common method of rate regulation is the prior approval system, under which each insurers rates must be approved by the state insurance commissioner prior to their introduction into the market. A few states instead require all insurers to charge rate that are set by the insurance commissioner, or by an industry rating bureau. The remaining states allow rates to be competitively determined, although most require that insurers file rate changes with the state commissioner.
The effects of rate regulation on insurers underwriting margins have been the subject lof numerous analyses. Most studies assess underwriting results by the unit price of insurance, the ratio of premium revenue received to losses incurred by the insurer. This ratio is a measure of the average price paid by insured per dollar of benefits received.
The variation in insurer size is considerable. The largest 50 firms write over 80 percent of all auto insurance premiums. Fully 90 percent of auto insurance premiums are written by only 90 firms. To put this into perspective, this means that 436 firms share only 10 percent of the private passenger auto insurance market.
Insurers also differ greatly in the extent of geographic areas served. For example, only 78 of the 526 firms in the market write auto insurance in all nine census divisions in the country. The remainder sells in only some regions of the country, and 191 firms sell in only a single state. Hence a vast majority of firms in the market have operations that are concentrated in particular geographic areas. While the national firms make up only 15 percent of insurance providers by number, these firms write 70 percent of total private passenger auto insurance premium volume. This implies that insurance markets are highly segmented by geographic location with relatively few firms writing the bulk of premiums nationally and a much larger number of local or regional firms writing the balance of the market in their particular area.
There are two major systems of distribution used in the industry. Some insurers use sales agents who sell exclusively the products of that specific firm. Other firms utilize the more traditional independent agency system, under which each agent may sell the policies of a number of insurance companies. Numerous empirical studies have shown direct writers to be lower cost sellers of automobile insurance than independent agency firms. Yet direct writing entails larger investment in firm specific assets and greater sunk costs of entry than independent agency because the degree of integration and centralization is greater.
In accordance with their operating cost advantage, direct writers dominate the auto insurance market, achieving a nearly 65 percent market share in 1989. However, consistent with the higher fixed costs of direct writing, there are fewer firms employing this system than the independent agency system. Of the 526 firms in the market only 101 are direct writers; the remaining 425 are independent agency writers. This fact, in conjunction with the statistics on market shares, implies that on average direct writers are much larger than independent agency writers. There are substantial size differences among direct writers, however, a few extremely large firms. While the 10 largest direct writers in the industry each write well over $1 billion in auto insurance premiums, the median sized direct writer has premium revenue of only $39 million. Nonetheless, this is significantly greater than the median premium volume of $ 19.5 million for independent agency writers.
In addition to differences in market shares, there are also great differences in specialization across firms. Of the 526 firms writing in the market, 88 firms write over 90 percent of their insurance premiums in private passenger automobile lines, and 233 firms write at least 50 percent of their business in auto insurance. Since private passenger auto insurance makes up only 35 percent of total property liability insurance premiums nationally, we classify these latter insurers as auto specialists. This group contains several high profile automobile insurers, as well as a large number of relatively small specialist firms.
These differences and differences in insurer organizational form are likely to reflect underlying differences in production and cost technologies. The data shows that a comparatively small number of firms, relative to the total number in the market, serve the vast majority of the market at the national level. This suggests that a relatively small number of large producers may possess a cost or technological advantage over the remainder of the producers in the market. This point of view is supported by comparisons of insurer expense data of auto specialists and direct writers, than other automobile insurers.
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