Market deregulation and insurer pricing strategies: The Japanese experience

Abstract

In 1998, rate regulation in the Japanese auto insurance industry shifted from a tightly controlled tariff regime to that of a less regulated (theoretically) prior approval system. While actual rate regulation is generally not directly observable, Danzon (1983) contends that the "true" character of regulation is indirectly observable in the pricing strategies of insurers. This paper applies Danzon's hypothesis to the Japanese auto insurance market. The empirical analysis employs a two-way random-effects panel data methodology that includes data from the domestic competitors in the Japanese auto insurance market over the 1991-2000 period. Even though an increased dispersion of pricing strategies corresponding to insurer size is observed after deregulation, our analysis reveals that the Japanese auto insurance market still operates much like a cartel. The implication is that despite formal deregulation, Japan's regulatory body still maintains significant control. © 2005 The International Association for the Study of Insurance Economics.