THE ECONOMICS AND POLITICS OF AUTOMOBILE INSURANCE RATE CLASSIFICATION

This article examines the direct efficiency consequences of government -imposed restrictions on rate classification in the auto insurance mar ket. It also analyzes the changes in insurance regulation that may acc ompany widespread restrictions on market classification and the source s 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 fo r legislative actions to control claim costs. Automobile insurance rat e classification restrictions and the associated regulatory and politi cal responses could seriously weaken the case for private sector provi sion of coverage.