Price Subsidies and the Demand for Automobile Insurance

This article tests for regulation-induced adverse selection in the Massachusetts automobile insurance market during the 1990-2004 period of fix-and-establish rate regulation. We demonstrate the application of the test for adverse selection in Finkelstein and Poterba (Journal of Risk and Insurance 81 (4):709-34, 2014) to a regulated insurance market using group-level panel data on purchase amounts and loss costs. Differences between rates that incorporate state-mandated restrictions and those based on actuarial estimates provide a proxy for the unused observables needed to implement the test. Consistent with regulation-induced adverse selection, proxy values indicating higher unpriced risk are statistically significant and positively related to both insurance purchases and loss costs.