Public Palicy and Praperty-Liability Insurance

The property-liability insurance industry has experienced significant turmoil during the past decade. Three related issues have received enormous attention: increases in the frequency and severity of insurance company insolvencies, high and increasing costs of automobile and workers’ compensation coverage, and volatility in prices and in availability of commercial liability insurance coverage. These phenomena have led to considerable debate over the efficacy of state insurance regulation and the industry’s limited exemption from antitrust law. Much of the policy debate concerns whether federal regulation of insurance company solvency, expansion of state regulatory control over insurance pricing, and narrowing or elimination of the exemption from antitrust law are needed to deal adequately with these problems. This paper addresses solvency regulation, rate regulation, and the antitrust exemption for the property-liability insurance industry. In each case, it first briefly reviews rationales for government action to enhance economic efficiency. Then it will discuss regulation in practice and whether proposed changes will enhance efficiency. The discussion suggests three conclusions. First, the case for substantive federal intervention in solvency regulation is not compelling, and federal intervention could ultimately lead to an increase in the total cost of insolvency. Second, state regulatory control of insurance pricing is inefficient. Rather than expanding state regulation, efficiency would be better served by deregulation of rates. Third, substantial change in the industry’s antitrust exemption will not alleviate market problems. It