The extensive over-regulation of automobile insurance rates in some states shines a spotlight on the potential benefits of a market-driven approach to oversight, Independent Insurance Agents of America (IIAA) President-elect Thomas B. Ahart told Congress today.
Ahart testified at an Oversight and Investigations Subcommittee of the Financial Services Committee hearing. He stated that it is IIAA’s desire to identify mechanisms that can make the insurance regulatory requirements among the states as uniform as possible while retaining flexibility to accommodate differing local, state and regional needs.
According to the IIAA, auto insurance rates are regulated in 49 states. Of those, 31 have a prior approval system requiring carriers to file rates for approval with the state commissioner before using them in the marketplace. In the remaining states, insurers can change prices without prior approval, but usually must file the rates with the insurance commissioner who can subsequently disapprove them. Only Illinois does not allow disapproval.
Citing problems with the rate regulation systems in New Jersey and Massachusetts, Ahart said the regulatory approach of these states “is motivated by the political desire to minimize insurance rates.”
The IIAA quoted a study by the American Enterprise Institute-Brookings Institution Joint Center for Regulatory Studies, which found that “state regulation of the $120 billion annual auto insurance market does not significantly decrease prices for consumers” but instead “generally reduces the availability of coverage and increases price volatility.” Conversely, this study found that “there is no evidence that prices or profits in states that rely on markets to set rates are excessive or that insurers behave collusively.”
Excessive rate regulation, the AEI-Brookings study found, “often results in rate suppression, meaning that the total amount of premiums collected in a state is less than would be collected under competition, resulting in a decline in the market value of insurer equity.” Indeed, in Massachusetts and New Jersey, dozens of auto insurers have withdrawn from the market because the approved rates in these states are grossly inadequate.
Ahart testified that for more than 20 years, New Jersey drivers have paid the highest auto insurance premiums in the U.S. He added that state officials were hopeful that a series of statutory reforms enacted in 1998, including a provision that mandated a 15 percent across-the-board rate reduction, would ease automobile insurance premium levels.
Looking closely at New Jersey regulation, Ahart noted that the state’s regulatory process is hindered by three burdensome requirements. First, insurers cannot earn more than 6 percent of their profits from sales of auto insurance policies over any three-year period. If a carrier does, it is required to return the “excess” profit to its insureds. Second, insurers are required to “take all comers.” This requirement inevitably results in good drivers subsidizing bad drivers, without paying higher premiums to make up for the shortfall. Third, New Jersey has imposed a territorial rate cap since the mid-’80s that limits rates in high-risk areas to 35 percent over the state average. The law essentially caps rates in urban areas and forces rural and suburban drivers to subsidize the difference through higher premiums.
Ahart stressed that the enactment of the 1998 reforms has, unfortunately, led to the departure of carriers that had insured over 25 percent of all New Jersey drivers.
Ahart said more carriers would have abandoned the state’s auto insurance market if they were not required to give up their licenses to offer all types of property-casualty insurance within the state.
In contrast, noted Ahart, efforts to streamline the rate oversight process in Illinois and South Carolina have resulted in dozens of new carriers and the reduction of insurance costs for many drivers.
Illinois has no rate regulation. Even though Illinois is highly industrialized with the massive Chicago urban center, the premiums Illinois drivers pay are consistently ranked in the middle among all states.
Also, the Illinois automobile insurance market currently is served by as many carriers as any other state. A South Carolina rate deregulation law enacted in 1999 has drivers there paying $80 less per year and has dropped the state from 26th in the nation in auto insurance rates to 38th. Also, over 100 new carriers have entered the state’s auto insurance market, noted Ahart.