From Regulation to Free Market: How to Explain the Experience of the European Motor Insurance Market
33 Pages Posted: 21 Nov 2004
Date Written: November 2004
In some European countries, the liberalization of the motor insurance market occurred in the 1990s led to increasing fares and claims with profits staying stable or decreasing. In this paper, we argue that these phenomena are due to the impact of liberalization on the companies' optimal choices. In particular, in the context of a spatial competition model, we show that in the short run price deregulation entails decreasing investments in monitoring and increasing indemnification costs, such that prices may increase while profits remain unaltered. In the long run, when the number of firms changes endogenously, premiums can be higher or lower than premiums prevailing under regulation, according to the dominance of a "competition effect" connected to entries or a "monitoring effect" raising marginal costs.
Keywords: Motor insurance, Spatial models, Regulation
JEL Classification: G22, L11, L50
Suggested Citation: Suggested Citation