The Effect of Rate Regulations and Compulsory Insurance Laws on Auto Insurance Purchases: Evidence from the US Personal Auto Insurance Market

This research examines the effects of rate regulations and compulsory insurance laws on insurance purchases. Three stage least squares (3sls) regressions have been employed to control for the endogeneity of the main variables, which are premiums, regulations, and insurance purchases. The stringency of rate regulation and the presence of compulsory insurance law are proxied by a residual market share, and uninsured and uninsured/underinsured motorist claim frequencies are used for insurance purchase variables. Consistent with previous literature, residual market share is negatively associated with uninsured motorist claims. However, the effect of residual market share is weaker or not significant on uninsured/underinsured motorist claims. This means that rate regulations and compulsory insurance laws are effective in decreasing uninsured motorist claims; however, they are less effective in increasing insurance purchases in general, because the chance of underinsurance increases.