The Research About China’s Regulation Of Motor Insurance Coverage And Rate

Motor insurance coverage and rate are both strictly regulated in China. Insurersshould get prior approval of motor insurance coverage and rate before sale. Insurersare not entitled to change them, unless approved by China Insurance RegulationCommission (hereinafter referred to as CIRC). The compulsory third party liabilityinsurance (hereinafter referred to as CTPL) has a fixed rate and uniformed coverageacross China, which should not be sold on any discount and the commission of whichshould not be over4%. Insurers should not decline any drivers’ CTPL, or sell itcombined with voluntary lines, etc. The outperformance of motor insurance coverageand rate regulations is against the interest of the public, which is best proven by lowpercentage of drivers insured and high operation expenses, even though CIRC shouldabide by the rule of safeguarding the interest of the public when it decides whether toapprove it or not. Many motor insurance coverage terms are indentified to be void inmany judgments. It’s a self contradiction that regulated and deregulated insurancecoverage and rate co-exist in China. Insurers often violate the regulated motorinsurance coverage and rate, even though CIRC always implements regulatorypunishments, which haven’t reduced the infringements of the regulations though. Theregulation of aviation accident insurance rate was eliminated and CIRC began toderegulate life insurance rate. CIRC promulgated a new notice to strengthen theregulations of voluntary motor insurance coverage and rate at Feb.23,2012that onlyqualified insurers are entitled to determine their own voluntary motor insurancecoverage and rate. However, the regulation of CTPL coverage and rate sustains. It’snecessary to probe into whether the regulations of motor insurance coverage and rateshould continue or not.The subject of this research is the regulations of motor insurance coverage andrate, including both CTPL and voluntary lines. From the stands of victims and drivers,CTPL has the same function as of voluntary third party liability insurance (hereinafterreferred to as VTPL). The common feature of CTPL and VTPL is that the coverageand rate of both are strictly regulated. Premium rate is the price of insurance coverage,which is reason why they are integrated in this dissertation. At the same while,insurance coverage and rate are regulated alongside each other in China’s insurancelaws and regulations.The main theories of this dissertation include transaction cost, game theory,rational choice theory, price theory, and risk management, of which the rational choicetheory is the fundamental one. The main methodologies include individualism, optimalincentive analysis, comparative analysis, method of induction and normative analysis.This research is undertaken from the perspectives of incentive compatibility, gametheory, transaction cost, market efficiency and risk management. The main conclusionsare as follows: 1, Motor Insurance Coverage and Rate Regulations Create Disequilibrium amongPICC, Ping An, CPIC and Small-medium Sized Insurance CompaniesWhy insurance companies don’t comply with the regulations of motor insurancecoverage and rate is that there is implicit rental between regulated rate and equilibriumrate. Small-medium sized insurance companies have big underwriting capacity to getmore premiums, while big premium scale is helpful to get underwriting profits. Thedominant strategy of small-medium sized insurance companies is to seek morepremiums, whatever in accordance with the regulations or not. There is identical CTPLcoverage and rate among all insurance companies across China, which is helpful forPICC, Ping An and CPIC to get more brand premiums. The big3insurance companieshave got big CTPL motor insurance premiums at low cost, which is helpful for them toget bigger voluntary motor insurance premiums, for voluntary motor insurance linesare complementary to CTPL and those drivers who buy CTPL from big3insurancecompanies have low price sensitivity and would like to get voluntary motor insurancepolicies from the same insurance companies too. The big3insurance companies havemade huge underwriting profits of motor insurance, even though there are enormouscross subsidiaries between voluntary motor insurance underwriting profits and CTPLunderwriting losses. Hence the dominant strategy of big3insurance companies is tokeep the existing regulations of motor insurance coverage and rate.2，Motor Insurance Coverage and Rate Regulations Increase the Information SearchCosts and More Judicial Supervision FeesThe regulations of motor insurance coverage and rate increase the informationsearch costs of motor insurance, because the violation of motor insurance coverage andrate is confidential, and insurance companies have incentives to conceal the violations,which results in more serious information asymmetry. The regulations postpone theunification of coverage and rate in practice, which results in information search timelonger. At the same while, Insurance Association of China has no incentives to changeCTPL coverage and rate, the big3insurance companies have no incentives to amendA/B/C coverage and rate either, and small-medium sized insurance companies have norights to amend A/B/C coverage and rate at all. Motor insurance coverage and rateregulations lead to more judicial supervision fees.3, the Inconformity between Regulated Rate and Equilibrium Rate Leads to EfficiencyLossesThe inconformity between regulated rate and equilibrium rate leads to oversupply or shortage of supply of motor insurance. The efficiency losses are backed bylow percentage of drivers insured and high operation expenses. Equilibrium rate is theresult of market competition, hence the rate based on loss ratio only is not equilibriumrate, and the rate adjusted on the differences across provinces is not equilibrium rateeither.4, the Split of CTPL and VTPL is Disadvantageous to Victims CTPL and VTPL are split in China, whereas CTPL provides basic coverage whileVTPL is complementary to CTPL. Victims are not adequately compensated via CTPLbecause of a low coverage amount, which is separated into3categories and calculatedon per accident regardless of the number of victims. VTPL is determined upon the riskpreferences and budget constraint of drivers, not upon the potential needs of victims.It’s uncertain that VTPL is really helpful for adequate compensation to victims becausethere are no incentives for drivers with low capital to buy high coverage amount. Thelogic that VTPL is complementary to CTPL is wrong because some drivers maybeprefer undertaking risks, while all the victims are risk averse.The regulations of motor insurance coverage and rate result in wrong allocation ofrisks among different parties, which is, first, risks are not allocated to insurancecompanies with lowest expenses; second, risks are allocated to drivers who lackeffective risk management approaches; finally, the risks of drivers’ lacks of sufficientcompensation capability are allocated to victims. This dissertation holds that theliberalization of motor insurance coverage and rate is in accordance with motorinsurance market in China, which will lower the transaction cost and operationexpenses, and increase drivers’ expected utility. CIRC should restructure the relation ofCTPL and VTPL from the perspective of victims, and only one CTPL seems to be aright choice to replace the current split CTPL and VTPL. CIRC only needs to set up aminimum coverage amount to the degree of full compensation to victims. Thatinsurance companies raise the coverage amount should not be prohibited. The rate andcoverage of new CTPL should be liberalized, which will result in a rate lower than thecombination of current CTPL and VTPL. CIRC should set up necessary legalenvironment for the liberalization of motor insurance coverage and rate, whichincludes lowering the market entry benchmark of insurance companies and insuranceintermediaries so as to promote competition, and establishing the credible market exitregulations of insurance companies, solvency and capital regulations so as to avoidover competition of rate.The innovative features of this dissertation are as follows:1. the main theoriesand methodologies are newly introduced to analyze the motor insurance coverage andrate regulations. From the perspectives of incentive compatibility, transaction cost,market efficiency and risk management, the main theories including transaction cost,game theory, rational choice theory, price theory and risk management, and the mainmethodologies including individualism, optimal incentive analysis, comparativeanalysis, method of induction and normative analysis are applied in this research.2.the main conclusions are original as follows: First, discovering the disequilibrium ofmotor insurance coverage and rate regulations between big3insurance companies andsmall-medium sized insurance companies. Second, motor insurance coverage and rateregulations increase transaction cost. Third, motor insurance coverage and rateregulations decrease market efficiency. Fourth, clarifying that the rate based on the loss ratio would not be equilibrium rate, and the CTPL rate adjusted based on thedifferences among provinces is not equilibrium rate either. Fifth, probe into thenecessity and feasibility of one CTPL to replace the split CTPL and VTPL from thestand of full compensation to victims. Sixth, confirming the necessary legalenvironment for liberalization of motor insurance coverage and rate. It’s the freemarket entry of insurance companies and intermediaries that would promotecompetition and the credible market exit of insurance companies, solvency and capitalregulations that would avoid over competition.