Abstract:
This case includes both conceptual materials on insurance and a description and assessment of a landmark regulatory decision that set auto insurance rates in Massachusetts. A series of essays describes the operation of markets under risk and uncertainty, the purposes of insurance, and the principles underlying its function. Market failures that arise when information is not fully shared--namely adverse selection and moral hazard--are assessed in depth. The Massachusetts case shows how a sophisticated regulator chose to set insurance rates when confronted with imperfections in the market for insurance (mainly due to regulation itself) and a political situation that was highly sensitive to insurance rates. The case also presents the principal arguments (and actual testimony) in favor of an alternative, less intrusive government role in the market.
Learning Objective:
This case may be used for teaching about the economics of uncertainty--the concept of efficient distribution of risk, the market failures that may result when information is distributed unequally, and the market for insurance. Second, it may serve as a focus for discussion of government regulation of consumer products, such as insurance, telephone service and utilities. In this context, the automobile insurance case is notable for the very high degree of analytic sophistication of the regulators and the political significance of the decision.
