Consumer Federation Says Prior Approval Works, Industry Says Not True

A nationwide consumer study of automobile insurance regulation says that rates have risen more slowly in the 15 states that require insurers to receive advance approval of rate increases from the state over the last two decades.

According to the Consumer Federation of America (CFA), states with “prior approval” regulation also performed well in spurring competition and generating significant profits for insurers.

The top-performing state in keeping rates down and providing comprehensive 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. As regulation is weakened insurance consumers are worse off, he said.

The CFA says its study is being released as the insurance industry continues to press both Congress and the states to dramatically weaken insurance consumer protections, particularly the oversight of rates that companies charge. The report maintains that these proposals will likely lead to higher rates, less competition and more insurer profits.

The Property Casualty Insurers Association of America (PCI) said that other studies found the conclusions CFA suggests to be off the mark.

“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, PCI’s president and CEO. “In states with price controls rates are more subject to political manipulation with adverse consequences, higher prices and fewer choices for consumers.”

Sampson added that experience has shown that a competitive market is more responsive to the demands of almost every consumer. Competition forces insurers to eliminate inefficiencies and stimulates companies’ efforts to attract and retain customers, offering innovative products that provide greater value to consumers.

The CFA study of automobile insurance regulation looked at all 50 states and the District of Columbia and examined a number of factors that are important to consumers, 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.

According to CFA, with the exception of the one state that mandates the rates insurers can charge, the 15 states that require insurers to receive approval for rate changes before they go into effect 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 good result.

California, Good or Bad?

“Twenty years ago, Californians got fed up with paying exorbitant insurance rates … so they took matters into their own hands and passed Prop 103,” said Harvey Rosenfield, author of Proposi-tion 103. “Proposition 103 has been an enormous success from both a consumer and an industry perspective. … As Congress considers an optional federal charter that would allow insurers to offer coverage in California but be (poorly, if at all) regulated in Washington D.C., it should carefully consider the negative consequences of overriding the will of the voters of the nation’s largest state and undermining the most effective system of insurance regulation in the country.”

The American Insurance Association (AIA) thinks California is a good example of why the CFA report was inaccurate.

“A major portion of the CFA report focuses on California’s Proposition 103 auto insurance system, touting its excessive regulatory requirements as representing the best in the nation. Yet, a more in-depth study recently released by the Competitive Enterprise Institute and the Heartland Institute, ranked California 46th out of 50 states and gave the state an ‘F’ grade based on two key questions: 1) how free are consumers to decide what insurance products will meet their needs; and 2) how free are insurers to provide products that meet consumers’ real or perceived needs?” said Debra Ballen, executive vice president for Public Policy Management for the AIA.

“While it is true that Californians have enjoyed some savings in the years since Proposition 103 was enacted, an analysis of underlying loss costs indicates that the vast majority of the savings were due to reductions in the underlying cost of insured claims, not regulation of prices, and that the loss cost reductions had little to do with Proposition 103,” Ballen said.

Ballen argued that the paper fails to engage in any before and after analysis that would show that less regulation results in more competition and lower costs for many motorists.

“For example, New Jersey and South Carolina have seen new carriers come into the market following an easing of price controls and moderating prices for consumers,” she said. She added that more recently, Massachusetts has reformed its regulatory system and encouraged competition in its auto insurance market; already, insurers that have long shunned the Massachusetts are entering the market to compete vigorously.

Neil Alldredge, vice president-state and regulatory affairs of the National Association of Mutual Insurance Companies (NAMIC) weighed in as well. “Prior approval laws, such as those found in California and New York, harm consumers by keeping rates high and discouraging competition.”

Alldredge added that NAMIC believes the study places undue emphasis on the average percentage increase in automobile insurance rates during the time period studied, while ignoring the fact that the states with the highest rates today are prior approval states, Alldredge explained. “California, whose regulatory system is hailed by the CFA as ‘uniquely effective,’ currently has the second highest auto insurance premiums in the nation.”

The study claimed that states with less regulatory structure over auto rates had higher rate increases and less competitive markets. “Taken to its logical conclusion, that would mean Illinois should have the highest rates in the country, since it is an open competition state,” Alldredge said. “In fact, Illinois ranks 28th.”

CFA Recommendations

Among other things CFA recommends:

1. State policymakers should implement comprehensive regulatory changes modeled after Proposition 103.
2. The National Association of Insurance Commissioners should not adopt insurer proposals to deregulate auto insurance.
3. Congress should reject efforts to weaken insurance regulation in the few states that do it well, whether through the adoption of an “optional federal charter” or other means.

The CFA study can be found online at http://www.consumerfed.org.