Insurance Industry, Five Forces, Rivarly, Barriers to Entry

The threat of entry (of new competitors) and Rivarly are two of the "Five Forces" in Michael Porter's framework for industry analysis.  Concerning the former, the basic idea is that "Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level." Among the factors creating barriers to entry are the intellectual property rights, capital requirements, brand equity, cost advantages, expected retaliation by incumbents, and government policy. 

Several other factors are said by Porter to increase the intensity of rivalry in an industry--and thereby lower profitability. The list includes the number of competitors, the rate of industry growth (the slower the growth the higher the rivarly),  intermittent industry overcapacity, exit barriers, diversity of competitors, informational complexity and asymmetry, and economies of scale.

Much of the discussion of late about healthcarere reform in the US concerns the relationship between barriers to entry and rivalry in the insurance industry. Many critics of the administration's plan prefer solutions that would force insurance companies to compete more agressively with one another. A key consideration for them are barriers to entry at the state-level.  For example, in an article entitled "Let Insurance Companies Compete Across the US", University of Chicago political scientist Charles Lipson, makes the case by first noting the presence of laws that prevent healthcare insurers from selling across state lines:

Right now, the U.S. does not have a national market for health insurance. It has 50 separate state markets. Erecting walls around each state means less competition and higher prices for consumers. There's not even one market for the Chicago area. If you live in South Holland or Calumet City, your insurance options could be completely different from your Indiana neighbors in Hammond or Merrillville. What sense does that make?

To help us understand the benefical effect that could arise from removing these laws, Lipson points to a very closely related industry where competition on price, differentiation, and even innovation are the norm--the market for auto-insurance:

The easiest way to see how insurance competition benefits consumers is to look at auto insurance. That's a huge, nationwide market and companies compete intensively for a share of it. Some stress their low prices, others customer service, whatever gives them an edge in the marketplace.Geico and Progressive have been especially aggressive in touting cost savings. State Farm and Allstate certainly compete on price, but they stress service after an accident. That's why Allstate says "you're in good hands," and State Farm says it will be there "like a good neighbor." Other companies, like SafeAuto, focus on drivers who want only minimum coverage to meet state license requirements. In short, auto insurance companies compete vigorously to provide what different consumers want, and they tell them so in national advertisements. Life insurance companies do the same thing. There are even companies that specialize in comparing policies for customers. Competition drives down excess profits and means better, cheaper options for consumers. Ever see an ad touting health insurance? They are rare because the markets are small and companies don't need to compete aggressively on price or service.

This last line is important. According to Lispon,  preventing health insurers from competing across state lines is needless barrier to entry, one that keeps the markets small and reduces the need or incentive for companies in the market to compete on either price or service.  This comports with Porter's model where both the number and the diversity of competitors in an industry increase the intensity of rivalry and by extension, bring many benefits for consumers.