When assessing whether the benefits of competition are likely to be achieved in a given industry it is customary to examine market structure and ease of entry into the market. The essence of competitive behavior is independent action by firms. The presence of only a small number of firms with large market shares in an industry increases the possibility of either tacit or active cooperation among firms to raise prices above costs, provided that the firms are protected from entry by other firms. Economists generally agree that market structure and ease of entry are highly conducive to competition in auto insurance and other property-liability insurance lines. [80]

Table 6 shows data on the share of private passenger auto premiums written by the top four, top eight, and top twenty insurer groups and on the number of insurer groups writing coverage. The table also shows another commonly used measure of market concentration, the Herfindahl-Hirschman Index. [81] Values are shown for the nationwide market and Michigan. Average values for the 50 states and the District of Columbia also are shown. While there is no firm criterion for assessing the point at which market concentration becomes high enough to produce significant deviations from competitive behavior, the levels of concentration shown in the table would be considered to be low or moderate by most economists. [82] Not surprisingly, the state averages for the concentration measures exceed the national level, but they are still relatively low. It also can be argued that the national values are more relevant given the ease in which insurers can expand writings into additional states. The values for Michigan are higher than the state average. The difference reflects the large market share of the Auto Club of Michigan (AAA), which wrote 27 percent of private passenger auto premiums in Michigan during 1988.

While most economists would agree that the levels of concentration shown in Table b would make non-competitive pricing unlikely, some critics of the industry would argue that these or similar data indicate that the industry is not competitive. [83] However, collusion is unlikely to raise prices even in highly concentrated markets if there are no entry barriers, since in this case potential entry can deter non-competitive behavior. Most economists have argued that entry barriers are low for new insurers. Moreover, existing insurers generally could readily expand their writings in new states or lines of business. [84]

Critics of the industry also argue that the industry's limited antitrust exemption facilitates price-fixing by insurers. [85] However, there exists substantial evidence of price variation across insurers for a given driver class and territory in Michigan and in other states. This evidence is prima facie inconsistent with price-fixing and cartel behavior. Most of the large auto insurers in Michigan and other states use independent rate filings (i.e., they do not rely on ISO prospective loss costs or advisory rates if available). For example, none of the top five insurers in Michigan utilizes ISO prospective loss costs. According to a study sponsored by the U.S. Federal Trade Commission, only 35 percent of insurers writing auto insurance in Michigan received rate information from the ISO in 1980. These insurers accounted for only 14 percent of premiums written in the state. [86] Instead of being anti-competitive, the ability of insurers to use rate services provided by advisory organizations is likely to enhance competition by reducing the cost of ratemaking and facilitating entry by small insurers. [87]