A nationwide consumer study of automobile insurance regulation says that rates have risen more slowly over the past two decades in the 15 states that require insurers to receive advance approval of rate increases from the state.
But the insurance industry says it’s hogwash.
According to the Consumer Federation of America (CFA), states with “prior approval” regulation also performed well in spurring competition and generating profits for insurers.
The top-performing state in keeping rates down and providing consumer protections was California, according to CFA, while the worst performing states were those with limited or no regulation of rates. These states had the steepest rate increases, less competitive markets and among the highest profits for insurers, says CFA.
“It is very clear that consumers fare best under a system of prior approval of insurance rates. Not only are rate changes held down, but competition is not dampened and profits are reasonable for the insurers,” said J. Robert Hunter, CFA’s director of Insurance and a former federal and state insurance regulator.
The CFA study looked at all 50 states and the District of Columbia, Hunter said. Included were rate increases from 1989 through 2005, insurer profits from 1997 through 2005 as measured by return on net worth and the current level of competition.
The 15 states that require insurers to receive approval for rate changes had the smallest increase in rates (54 percent) from 1989 through 2005. CFA highlighted California as an excellent example and said that the Proposition 103 initiative contributed to the result.
But other studies have pointed to an opposite conclusion, according to insurers.
“Opponents of competition-based rating such as CFA have the misguided impression that a prior approval system keeps insurance rates down. Ultimately price controls reduce the number of insurers doing business in a state, reduce consumer choice, and restrict market innovations,” said David Sampson, president and CEO, Property Casualty Insurers Association of America (PCI).
The American Insurance Association (AIA) thinks California is a good example of why the CFA report is inaccurate.
It said a “more in-depth study” by the Competitive Enterprise Institute and the Heartland Institute, ranked California 46th out of 50 states.
Debra Ballen, AIA executive vice president, said that cost savings realized since Proposition 103 were due to reductions in the underlying cost of insured claims, not regulation of prices, and had little to do with Proposition 103.
Neil Alldredge, of the National Association of Mutual Insurance Companies, said that the CFA study, “taken to its logical conclusion,” would mean Illinois should have the highest rates, since it is an open competition state. In fact, he said, Illinois ranks 28th.
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