How deregulation shapes market structure and industry efficiency. The case of the Italian motor insurance industry

Motor insurance is the most important insurance line in Italy, accounting for about 60.4 per cent of direct non-life insurance business and for 22.3 per cent of total insurance premiums in 2002. Its nature as compulsory insurance, its influence on the inflation rate, together with the growing role played by biological damage reimbursements and by fraud, have opened a deep and sometimes harsh debate, both in the political and technical arenas, on the measures to be adopted in order to get tariff levels under control, to increase efficiency and to promote competition. The main question addressed by our paper is if and how, over the period 1982–2000, deregulation measures influenced the structure of the supply side of the market and the efficiency and productivity of the companies operating in the Italian motor business. In particular, we focus our attention on three main aspects: 1) the effects of deregulation on the dynamics of insurers (at an aggregate level, i.e. the total number of insurers in the motor insurance market from 1982 to 2000 and the entry-exit process); 2) the effects of deregulation on the rate of growth of insurance activity (as measured by premiums by line of business, in particular the motor insurance business compared with non-life and life business); 3) the effects of deregulation on the efficiency and productivity of a sample of Italian motor insurers. Techniques used include Loess, to show the existence of trends in time series, and efficiency analysis methods, in particular Data Envelopment Analysis (DEA) and Malmquist analysis. DEA has been widely used in recent years to estimate efficiency in a variety of industries and national markets.