Division of Roles between Compulsory and Voluntary Insurance : The Case of Japanese Automobile Liability Insurance Scheme

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概要

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• This study attempts to provide a theoretical framework for the division of roles between compulsory and voluntary automobile insurance by analyzing the effects of the Japanese double-layered scheme on insurance availability and adverse selection. Japanese automobile insurance is unique as it consists of two different components: compulsory automobile liability insurance, operated under tariff rates, and voluntary automobile insurance, under which certain types of risk classifications are allowed. The Japanese scheme is doubtlessly viable since it has successfully contributed to the availability of insurance coverage and avoided an increase in uninsured motorists. It is, however, still controversial because the double-layered mechanism can increase the transaction costs borne by the concerned parties including insurers, policyholders, and regulators. Nevertheless, there are not many existing studies specific to automobile insurance that analyze the optimal domain of compulsory and voluntary insurance, which will efficiently ensure insurance availability and avoid adverse selection. Our investigation emulates the approach of Zweifel (2000), which provides implications on social and private insurance in the life and health insurance sector from the aspect of market equilibrium. However, we substantially expand his analytical model to compulsory and voluntary automobile insurance to better reflect the actual practices in the Japanese market. Our analysis shows that the double-layered automobile insurance system is cost-effective in minimizing adverse selection and preserving insurance availability only when compulsory insurance is provided at the contact point between the fair-price line of the pooled premium and the indifference curve of low-risk drivers, and simultaneously, voluntary insurance is offered in the surplus area of compulsory insurance on a risk-differentiated basis. Key words: compulsory automobile liability insurance, voluntary automobile insurance, market equilibrium, insurance availability, adverse selection

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