Auto insurance companies manage risk by classifying drivers into risk groups and setting premiums accordingly. State interventions, such as mandating low premiums or requiring insurance purchase, influence how companies distribute insurance, sometimes leading them to withdraw services or selectively insure individuals to maintain the balance as dictated by the fundamental law of insurance.
Auto insurance companies manage risk by classifying individuals into risk groups, a practice that can lead to controversy when classifying drivers who've had accidents in the past. Companies often charge higher insurance premiums to those they consider high-risk based on previous accidents. The insurance industry also faces problems such as moral hazard and adverse selection, which occur due to attempts at categorizing insured individuals into risk groups and imperfect information in the market.
State insurance regulators may intervene by setting lower premiums or requiring that everyone purchase insurance, like auto insurance. These interventions are designed to manage the balance between risks and premiums in the insurance market. However, such actions can compel insurance companies to limit their services in certain regions or to certain individuals, especially when laws dictate the selling of insurance at low prices to everyone, regardless of risk level.
Ultimately, in markets like New Jersey or Florida, where regulators have tried to maintain low premiums, insurance companies have either ceased operations or selectively chosen clients to ensure that their average payouts do not exceed the premiums they collect. This is essential to maintain the fundamental law of insurance, which states that payouts cannot surpass collected premiums on average.