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This article examines the direct efficiency consequences of government-imposed restrictions on rate classification in the auto insurance market. It also analyzes the changes in insurance regulation that may accompany widespread restrictions on market classification and the sources and consequences of political pressure for and against restrictions. The direct efficiency effects of restrictions are somewhat ambiguous, but the indirect effects of restrictions will probably be to increase the cost of risk by distorting incentives for claim settlement and for legislative actions to control claim costs. Automobile insurance rate classification restrictions and the associated regulatory and political responses could seriously weaken the case for private sector provision of coverage.
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Harrington et al. (1993) studied this question.
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