Abstract

This paper analyses the economic and institutional framework of the compulsory third party car insurance market in Italy during the nineties. It is shown how prices have increased over time, following liberalisation. We argue that this is due to a twofold failure in the liberalisation model: i) an implicit loss of control of cross-subsidies among policyholders and ii) the diminished incentives for insurance companies to reduce production costs. The consequent crisis both in terms of equity and efficiency calls for a systematic analysis of the opportunities to reshape the nature of insurance coverage and to favour the availability of new contractual structures, as well as the possibility of public intervention aimed at reducing production costs. Competition in compulsory insurance markets should also be assessed within the European system, in order to achieve a good balance between transparency, efficiency and fairness.