Question

The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance?

Answer 1

The acquisition in State Z and subsequent premium increase is an example of why insurance regulation is necessary to prevent market abuse and ensure fair pricing.

Step-by-step explanation:

The scenario where the largest title insurance company in State Z, with a 50 percent market share, acquires the second largest company with a 30 percent market share and subsequently raises premiums by 75 percent demonstrates a rationale for the regulation of insurance to prevent anti-competitive practices and market abuses. When a single company controls a large portion of the market, it can manipulate prices, often leading to higher premiums for consumers. This practice is constrained by state insurance regulators who aim to keep premiums low and ensure wide availability of insurance coverage, as seen in the actions of insurance regulators in New Jersey and State Farm's decision to stop selling property insurance in Florida due to stringent regulation.