Alon Rubinstein (Wharton): How Do Insurers Set Premiums and Coverage? Evidence from the Commercial Auto Insurance Industry
Abstract: I study how insurers price and ration coverage in unregulated selection markets. Using proprietary records from a large auto insurer together with competitor quotes, I document a sharp asymmetry: premiums respond modestly to expected costs, while denials are frequent and cost sensitive. I develop a model with imperfect competition and fixed costs in which demand rises less than proportionally with risk, compressing markups as costs increase, shifting adjustment to the extensive margin. Netting out demand-driven markups restores near-unit cost pass-through into premiums, while denials reflect fixed costs and overweighting of noisy loss signals. This rationing disproportionately harms high-cost, small clients.
Economics
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