In contrast, the number of insurers nearly doubled following the 1997 deregulation in South Carolina. Significant market exit did not occur following the 1989 introduction of price regulation in California, most likely because rate suppression was modest due to declining insurance loss costs in California during the 1990s. The amount of cross-subsidies and the degree of rate suppression vary by state and over time. Harrington's findings, which confirm and extend those of a number of prior studies, indicate that on average prior approval regulation has had little or no effect on rate levels over time. This is partly because insurers are reluctant to reduce prices in regulated states, even when premiums are high relative to expected costs, out of concern that they will not be able to raise premiums again if cost inflation accelerates.
Insurers lose investment income on the premium deficiency during periods when rates are suppressed.
This cash flow uncertainty increases the risk faced by insurers and leads to higher costs of capital and ultimately higher insurance prices. 7 Subsidization and rate suppression create additional economic inefficiencies. 8 Harrington shows that regulation also results in reduced coverage availability in the voluntary insurance market, generally increasing the size of the residual market in regulated states. In addition, regulation leads to more premium volatility because price changes are less frequent and larger in regulated states than in competitive states. In summary, rate regulation does not significantly reduce long-run prices for consumers.