California Insurance

Consider the following scenario: A vital national industry is characterized by intense competition between hundreds of sellers, including dozens of instantly recognizable brands. These sellers aggressively market their product to buyers, heavily advertising through television, radio, print, direct mail and every other known medium; specifically and they actively compete with each other with respect to price. Buyers can purchase their product through to a trained sales force, by calling toll-free numbers, or by pointing and clicking on the Internet. The product is sold relatively standardized due to government regulation of its contents.

Is this a market price appropriate for government controls? All but the most extreme answer would observe with a resounding “No!” It is bedrock American public policy that competition is the most ruthless and effective regulator of price in such a marketplace. Competition drives prices down to where sellers can make a reasonable profit and no more, so we only apply that price controls are in monopolistic markets and / or noncompetitive.

The auto insurance market meets the above criteria, but because some states (including California) aggressively regulate the price of insurance, because Congress is exercising its oversight role over trade and examining this anti-competitive practice. The Chronicle, however, recently blasted any federal effort “that could undermine this state’s voter-approved controls on auto insurance rates.” (Editorial, April 7) But this is very much Congress’s business, and the Chronicle’s position, though politically expedient, does not empower consumers.

Proposition 103, the 1988 government initiative instituting prior approval of auto insurance rates, is often portrayed as a boon to policyholders because, since that time (according to the Consumer Federation of America), price increases in California have been below the national average and carrier profitability has been higher than other states. This is not, however, attributable to Proposition 103’s price controls. Since 1988, the extraordinary conditions in California, independent of Proposition 103, fresh losses have driven - and premiums - down dramatically. In 1988, for instance, to suddenly switch from liability rules the California Supreme Court eliminated a whole class of costly losses for carriers, furthermore, the toughest seat-belt, drunken driving and road-construction safety laws in the country all payouts drastically pushed down made by insurance companies.

In fact, loss due to these trends, California auto premiums should have been lower than they were actually since Proposition 103 Instead, price controls robbed consumers of their full windfall. Carrier high profitability, cited by The Chronicle as proof that price controls helped the market, on the contrary conclusion demonstrates the ineffectiveness of rate regulation. Competition naturally drives prices down to the level where sellers can make appropriate but not excessive profits.

California’s rate controls, however, twist, carriers’ incentives. Because they fear that government will disable adequate rates in tough times, they naturally and understandably hedge against the punitive regulatory system by not lowering prices as far as they normally would in good times. Thus, profits –

and prices - are too high. So Proposition 103’s rate regulation - sold to the voters as a means of forcing carriers to charge less in order to make a mandatory affordable product - instead curbs competition among carriers and makes consumers dig deeper to pay their premiums. Price controls have melted down the auto insurance marketplace in some states (like New Jersey). That might have happened in California, too, if not for the state’s loss incidental expenses levels.

I served as Illinois insurance commissioner for four years. Though maligned editorial in The Chronicle, the Illinois system of regulating insurance rates through market competition has produced the broadest carriers of choice for consumers and an affordable prices competitive with product to or lower than the national average (highest for 27th and 39th highest auto for homeowners , According to an Insurance Information Institute compilation). Illinois actively regulates solvency and market conduct, but leaves oversight to the price of experts: supply and demand.