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. However, it does generally reduce availability of coverage, increase price volatility, and reduce the quality and variety of services available to consumers. Regulated rates tend to subsidize high-cost drivers, creating perverse economic signals and increasing accident costs.
Regulation also increases cash flow volatility for insurers, raising the cost of capital.
In essence, regulation creates material economic inefficiencies in order to provide cross-subsidies to the drivers who impose the highest costs on state automobile insurance systems. The clear policy implication of these findings is that deregulation of property-casualty insurance premiums is long overdue. The author thanks Robert Hahn, Dwight Jaffee, Robert Litan, and Thomas Russell for helpful comments on an earlier draft of this paper. J. David Cummins is the Harry J. Loman Professor of Insurance and Risk Management at the Wharton School of the University of Pennsylvania. 3641 Locust Walk, Philadelphia, PA 19104.