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]
