| Purpose. The regulation of insurance rates remains contentious as insurance regulation evolves. In 1988, California passed Proposition 103, a measure that changed the state's insurance marketplace from open rating to prior approval. Studies of the effects of rate regulation have drawn their data almost exclusively from automobile lines of coverage, with the resulting regulatory discourse and public policies being largely automobile insurance-based. This study examines the effect of rate regulation on homeowners premiums, the FAIR Plan, and market structure in California. Homeowners coverage provides the second-highest personal-line premium volume. The validation and replication of findings from a different coverage will inform public decision making.;Theoretical framework. Competitive market theory presupposes that the supply and demand mechanism determines insurance rates. Regulatory intervention thus rests on a demonstrable market failure in a reasonably competitive and/or monopolistic market, and substantial evidence that regulation can efficiently mitigate the failures. To the extent that there are market imperfections, regulation becomes necessary to protect the public by mitigating these failures.;Methodology. A quantitative-comparative approach was used to measure rate regulatory impact on the homeowners market. Using secondary data set, three interval-ratio measurements contrasted three hypotheses. A t-test of difference for independent samples was utilized, while multiple regression analysis was used to isolate the separate effects of predictor variables on dependent variables.;Findings. Significant differences exist in average premiums, FAIR Plan, number of companies, and market shares. While average premiums, FAIR Plan, and market shares of captive and direct writers correlate positively, market share of independent agencies and the number of companies for the three distribution channels show negative relations. ANOVA corroborated the significant difference but not in FAIR Plan or market structure.;Conclusions and recommendations. Regulation is not anti-business per se but rather provides accountability and responsibility. The underlying claim costs appears responsible for increased insurance costs; therefore, loss prevention and loss control should be advocated, while higher minimum deductible should be legislated. The legislature and industry should provide tools and incentives for loss reductions, while the industry should use the best actuarial science available in setting rates. Future policies on cost containment should focus more on insurance variables and less on free-market mechanisms. |
