From regulation to free market: the experience of the European motor insurance market

Increasing premiums, increasing claims and decreasing profits are three striking facts associated in some European countries to motor insurance liberalization of 1990's. In this paper, we argue that these phenomena may be considered not a consequence of collusion or other misapplications of deregulation but rather an effect of the impact of liberalization on the companies’ optimal choices. In particular, by extending the Salop-Economides model, we show that price deregulation involves decreasing investments in monitoring and increasing compensation costs. Therefore, the transition from regulation to competition can yield prices and profits moving in either direction and possibly opposite directions.