A study of private passenger automobile insurance regulation: The effects of regulatory change on the Texas insurance market

This dissertation develops a theory of private passenger automobile (ppa) insurance regulation and examines the effects of regulatory change on the ppa insurance market. Specifically, the market impact of the 1991 changes in the rate regulation of ppa insurance in the state of Texas is studied. The 1991 “flexible-rating” law enacted in Texas enabled rate-regulated insurers to set their own rates for ppa insurance within a plus-or-minus thirty percent band of the “benchmark” rates established by the insurance commissioner. Flexible rating replaced a more restrictive regulatory structure which required insurers to receive prior-approval in order to deviate from the state's benchmark rates. As a result of the change, rate regulation in Texas became less binding on insurance prices. The major empirical findings of the paper are that flexible rating has led to increased availability of ppa insurance with a corresponding decline in the number of Texans insured through the “assigned-risk” plan. Also, there has been a noticeable improvement in the financial health of insurers as reflected in the fall of the liability loss ratios of ppa insurers.; The analysis begins with a simple theory of insurance. Following this introduction, the literature of the economics of ppa insurance regulation is reviewed. A theory is then developed about the economic effects of automobile insurance regulation and the reasons for its existence. Evidence is then presented of the effects of the regulatory change in Texas. The dissertation concludes with policy implications and suggestions for further research.