TABLE 6 MEASURES OF CONCENTRATION IN INSURANCE Percentages of Assets and Sales Held by Top Five Companies (or Groups) While in some unregulated industries some four to eight firms will account for 50% or considerably more of all sales, 15 in property and liability insurance not even the twenty largest companies and groups could account for as much as 50% of all earned premiums in 1960.16 It is true that in some specialized segments of the insurance market there is a very high degree of concentration. In the writing of nuclear protection and aircraft fleet coverage, for example, the number of alternatives open to the buyer is extremely limited. Because there are relatively few firms with the capacity and willingness to respond to these special high-risk demands, something akin to natural monopoly exists. This is not a matter of conspiratorial exclusion but of a very special set of demand and supply conditions. In the mass-coverage property-liability lines, such as fire, automobile, and workmen's compensation, no such natural concentration exists. What is apparent to the student of industrial organization is an historical transition in the insurance industry. After a long period of collusive symptoms in its market behavior, there has come about recent evidence of more competitive symptoms-no doubt prompted in the mid-1940's by judicial and legislative actions. In addition to our investigation of concentration in the industry, we will want to discuss some of these symptoms. ENTRY AND EXIT CONDITIONS The entry of firms is one indicator of competition, showing the motivation of new firms to improve upon the price or products, or both, of the established firms in the industry. Exit is another, showing the weeding-out effect of comparative efficiency among firms. It has been possible in recent years for young, vigorous newcomers to enter the field and rise rapidly to prominent positions in the industry. The solid successes of Allstate and State Farm illustrate this point. It is also possible for imprudent or even unethical firms to enter the industry and build business on cut-rate prices and poor risks. Although requirements vary from one state to another, barriers to entry into the insurance industry are not notably high. From the point of view of fiduciary and solvency considerations, it could well be that they have in some places not been high enough. The banking industry is considerably more stringent about accepting newcomers, and has a much lower mortality rate. In the history of American insurance, 1073 property and liability companies have been forced to retire because of financial difficulties of one kind or another. 17 15National Bureau of Economic Research, pp. 74-75. 16Crane, pp. 38-39. 17 Crane, p. 74 Formal entrance requirements in the several states range from the restrictive to the lenient. In many respects the New York pattern is typical, if somewhat intricate. The principal requirement in most states governs the capital and surplus related to the classes of coverage to be written, and to the form of business organization providing the coverage. (See Appendix A.) For example, for a stock casualty insurance and surety company to offer boiler and machinery insurance in New York State, it must be capitalized at $100,000, with i surplus of at least 50% of capital. To offer only burglary and theft coverage, its capital must be at least $200,000 and its surplus 50% of that. But to do both, these amounts are added together ($150.000 + $300,000), with $50,000 deducted from the total. On the other hand, a mutual casualty insurance company would have no capital requirement but would need an initial surplus of $150,000 if organized to provide burglary and theft or boiler and machinery coverage. If already organized to provide other forms of casualty coverage it could add such lines at $50,000 additional surplus each. Thus entry into multiple-line business could cost from $500,000 to $1 million in capital and surplus requirements--or up to $5 million if on a national scale. 18 In a few states the cost could be less than $100,000. Once such requirements are met, outlays for physical facilities and working capital tend to be quite reasonable when compared to manufacturing, for example. The principles of insurance are of course in the public domain, and computational technology is not a significant barrier. There are some barriers which are not so obvious but are nonetheless important. The agency system of selling insurance is a mature and sophisticated one. Its behavior is concerted in support of the status quo and thus constitutes a marketing barrier to entry. Any new firm must spend heavily on sales talent, sales management, and other selling costs to penetrate consumer markets in volume. The high advertising budgets of the low-rate direct-writers bear witness to this point. The necessity of gearing an insurance operation to the reinsurance network, itself a more imperfectly competitive market than insurance, represents another obstacle to sustaining a new entrant. (Our study of insurance markets has not addressed the reinsurance function in significant detail. Denial of reinsurance was an effective way of compelling uniformity and of restricting entry prior to Supreme Court and Congressional action in the mid-1940's, but both entry and diversity now seem comparatively free. A substantial I volume of reinsurance business is conducted in the U. S. by unadmitted alien companies, especially through Lloyd's of London. Although we cannot say how much more competitive insurance markets could be if reinsurance were supplied by a larger number of firms, we can say that the competitive signs we have seen in property and liability markets exist despite whatever restrictive effects the reinsurance system may theoretically impose. Since price formations in insurance and reinsurance markets are interdependent, and quantitative data on reinsurance are relatively scarce, a fuller investigation of reinsurance markets should be made.) So also, the presence of established rivals who can put together multiple-line package deals and who can group the strength of many locations behind one constitutes a formidable challenge to the smaller newcomer. The degree to which economies of scale 18Roy J. Hensley, Competition, Regulation and the Public Interest in Nonlife Insurance (Berkeley: Univ. of California Press, 1962), p. 52. favor the older, larger companies is, however, less than in manufacturing establishments. Premium volume increases are not always accompanied by less than proportionate costs, and the loss ratio of a big company can rise to offset a falling expense ratio. As competiton seeks to express itself more and more in terms of product differentiation, as firms cultivate customer interest and loyalty on some basis other than price alone, the newly entered firm has the problem of distinguishing its product from others and eroding those loyalties. This non-price competitive challenge is often more important than the issue of price. What has been the net effect of these conditions, some of which encourage andTM some of which hinder entry? Crane writes: According to records kept by the American Mutual Insurance It is concluded that there are few serious obstacles to entry into the Thus far we have looked at the insurance industry from the point of view of two criteria of competitive process--concentration and ease of entry and exit. On both counts a fairly good case can be made for judging the industry reasonably competitive. This tends to explain why the rate of return on assets placed at the risk involved fails to show evidence of excessiveness. PRICE AND PRODUCT VARIATION We now turn to address more direct symptoms of the market process-namely, variations in price and product. A low level of concentration and relatively easy entry 19 Crane, p. 20. conditions are generally conducive to price and non-price competiton, but in the insurance field there are offsetting factors. The fear of insolvency tends to put a floor under rates, just us state regulation tends to put a ceiling over them. A cloud of ambiguity hovers over the pricing process in the insurance industry. The principles of insurance as a rational social system for sharing some of the costs of ancertainty are rooted in the laws of large homogenous aggregates. It is therefore essential that there be a statistical compilation and analysis of large populations of events if rates hearing a proper relationship to these costs are to be computed. Historically, members of the insurance industry have united in various bureaus, sanctioned by law, for the purpose of rate-making-in-concert, based on these critical data. The question naturally arises whether their necessary collaboration has passed from the "merely statistical" to the "unfairly collusive." That the bureaus have had their day as collusive and restrictive organizations is hard to deny. That their restrictive power has been in decline in recent years is also apparent. The way socioeconomic games are played in the United States, it cuts little ice for anyone to maintain stoutly that he does not, or would not dream of, using any monopoly power at his disposal. Rating bureau claims that they are simply engaged in actuarial science in a purely advisory way are typically not taken as seriously as they are given. What evidence is there to overcome the assumption that rating bureaus may be restrictive in their overall effects on the competitive discipline of insurance markets? In the property and liability phase of the business the number of independent rate filings and deviations has increased considerably in recent years. In Wisconsin, for example, in 1957, off-bureau rates prevailed in 81.5% of automobile filings. 55% of the general hability line, 52.6% of multiple peril, 39.9% of fire, and 25.1% of inland marine. 20 As always, the facts about below-bureau rates prompt fears of insolvency via rate-cutting, just is anti-insolvency moves by bureaus or others prompt fears of excessive rates. State insurance regulations and judicial decisions have helped to lessen bureau authority. In California, and more recently in Florida and Georgia, automobile rate regulation is particularly lenient (see Appendix A). The courts have ruled that an insurer need not be a bureau subscriber with respect to all of the lines he might write. And now the bureaus themselves no longer constitutionally require rate conformity of their members. In this more permissive climate exceptions to bureau rates have multiplied. Hensley reports that in the decade from 1948 to 1958, the percentage of all fire and related types of premiums written at deviated or independent rates rose from 3.5% to 14.4%.21 When rates are formulated by bureaus or by public regulatory bodies it is customary to build into them a "reasonable underwriting profit"-most often 5%--to which insurers are said to be "entitled," sometimes by law. This does not guarantee a profit in fact, but is meant to "allow" and "curb" profits at the same time. 20 Charles C. Center and Richard M. Heins, Insurance and Government (New York: McGraw-Hill, 1962), |