Auto Insurance Rate Regulation

Study Says State Regulation of Auto Rates Does Not Lower Prices

By Werner E. Kruck CPCU, ASLI

December 12, 2001 - How often do politicians attempt to gain favor from the public by promising to fix the things that bother us the most? How often do we think that the problem is "fixed" simply because someone is doing something, without really asking if the efforts are truly effective?

According to recent findings of a study by the American Enterprise Institute - Brookings Institution joint Center for Regulatory Studies (http://www.aei.brookings.org/), this is exactly the situation we find ourselves in with the regulation of automobile insurance rates. Regulation does not keep prices down.

In 31 states, insurance companies must submit a proposed "filing" of the rates that they wish to use, along with the "justification" for the changes. Before they can use these rates, the state insurance department must "approve" them. In the remainder of the states except for Illinois, the insurance company "filing" must still be submitted, but the company may use the new rates immediately, and the insurance department has a specified number of days to object to the changes. Illinois is the only state that has truly open competition.

When there is open competition, companies compete aggressively to lower premiums to attract the best risks, such as drivers without accidents and violations. Just as aggressively, they push rates up on those that tend to have the most claims, such as those who drink and drive, and those that live in more congested areas.

Regulation is almost always enacted because those paying the highest rates object to the "fairness", and the result is that companies must raise the rates on the good drivers to keep the prices low on the groups of drivers that have the most claims. This social engineering to create "fairness" many times has the unanticipated effect of making it affordable for drivers that society might want off the road to keep driving.

What the study does not say…

The study does not discuss the role that regulation has played in keeping rates higher during the recent period when the costs of insuring the average driver were dropping! Over the last few years, ending in late 2000, automobile claims cost and frequency trended downward due to a number of factors, including demographics, tort reform, and medical cost containment. Did the rates fall in step?

No. Insurance companies know that departments will most always give fast approval to rate decreases, but that rate increases are frequently negotiated downward and delayed. The more difficult the state is on regulating rates, the less likely insurance companies are to reduce their rates, since when the costs go up, they will be trapped with inadequate rates. While companies did lower rates somewhat, they also made substantial profits that they had not anticipated. Unfortunately, the underlying costs are now increasing, so we can look forward to rate increases beginning again.

Why regulate prices?

Many times the argument for heavy regulation of rates is that people need to drive and auto insurance must be kept affordable. It is interesting that the other cost components of driving are not similarly regulated. When have we told the automakers that they must keep their cars priced at a certain level? We don't keep gas prices low, in fact we tax them and push them higher!

Unfortunately, it is easy for politicians and consumer activists to get people excited over the evil insurance companies who are making huge profits on the ever unsuspecting and defenseless consumer. Insurance companies are masters at playing right into their hands with defensive sounding communication strategies that seem to only reinforce the accusations. The truth is in the middle and the consumer is now getting the power to solve the problem.

What can we do?

First, always look for the truth somewhere between the arguments of the polarized parties. Both sides have legitimate points. Take matters into our own hands!

There are increasing options for consumers to get auto insurance quotes over the internet without having to talk with an agent or customer service person. As more of us become comfortable with comparing rates (and it can be really worth doing, by the way), we will begin to realize that regulation is actually limiting our choice as consumers, and we really do not need regulators to protect us. We can find out what our options are and we have the power to choose!

We can vote with our premium dollars.