Does Rate Regulation Alter Underwriting Risk?

This research tests for a relationship between prior-approval rate regulation and differences in the mean and variance of individual insurer combined ratios in the private passenger auto line. A number of company-specific and market-specific control variables are also included to better isolate the effect of rate regulation. In addition to the traditional “prior-approval/open-competition” dichotomy for state rate regulation, the 1994 Conning & Company measure of regulatory stringency is included in the regression model to account for the effect of overall regulatory environment. Prior approval laws showed no statistically significant relationship with either the mean or variance of the combined ratio, although an inverse relationship between the variability of year-to-year underwriting results and the Conning & Company regulatory freedom score was found.