Today’s auto insurance oversight system suffers from a lack of efficiency, cost effectiveness, and timely decision-making, but greater regulatory reliance on market competition would help streamline and depoliticize the process, the Independent Insurance Agents & Brokers of America (IIABA) testified July 30.
“Many of the same inefficiencies and delays that arise in the regulation of life and commercial products also apply to the oversight of auto insurance. It is an area wrought with inconsistent state requirements and excessive government interference,” IIABA president Thomas Ahart, said during a panel discussion at the National Conference of State Legislators’ annual meeting in Washington, D.C. “Given the size and scope of the auto insurance market and its broad impact on society, its regulation is often politicized—and extensive automobile rate regulation is most often motivated by the political desire to minimize insurance rates.”
Ahart pointed to an April 2001 report on personal lines rate regulation by the American Enterprise Institute (AEI) and the Brookings Institution Joint Center for Regulatory Studies. The study found state regulation of auto insurance does not decrease prices for consumers—the intended effect of lawmakers and regulators —but instead reduces coverage availability and increases price volatility.
The AEI/Brookings study recognized that rate regulation often results in rate suppression, meaning that the total amount of premiums collected in a state is less than would be collected in an efficient and competitive market. In states like New Jersey and Massachusetts, dozens of auto insurers have left the markets over the last two decades because approved rates are grossly inadequate.
“In a competitive economy such as ours, insurance companies cannot be required to lose money. When faced with this prospect, the only effective alternative for auto insurers is to abandon the market completely—and too many companies are being forced to make this difficult decision,” Ahart remarked.
The unintended consequences of a politicized auto insurance oversight system have hurt consumers, too, according to Ahart. Those with good driving records or who live in lower exposure areas subsidize high-risk, high-cost drivers; consumers pay higher rates because insurers are reluctant to reduce prices when warranted because they are concerned they will not be able to raise premiums when necessary; and consumers have fewer options, and insurance agents have fewer products to offer when companies exit markets.
Ahart cited positive reforms in South Carolina and Illinois that have led to dramatic turnarounds and could be used as models for other states.
For example, rate reforms adopted in South Carolina during the late 1990s helped turn that state’s market around. Under the new rules, carriers may increase or decrease automobile rates in a year by up to 7 percent without prior approval and amend their rates by a greater percentage under a much more liberalized and predictable “file-and-use” system. “Flex-rating” and “file-and-use” regulations allow carriers to use proposed rates much quicker and have brought about greater certainty for the state’s insurers and consumers.
“As a result of these competitive-based reforms, drivers are paying on average $80 less per year for auto insurance. The ability to underwrite each driver individually, the new pricing certainty, and the elimination of an uncertain rate- approval process have led to the entry of dozens of new carriers and generated declines in consumer prices,” Ahart testified.
The IIABA leader also addressed the use of credit scoring, saying that the controversy arose as some companies began using credit data rigidly and exclusively in the underwriting and pricing of insurance policies, and many others were overusing and over-relying on credit information.
“IIABA recognizes there is a strong correlation between credit history and insurance losses, which help companies price products more carefully, and that credit history is a very powerful predictor when applied across the board. However, agents are concerned about the exceptions that inevitably occur,” Ahart commented. “Many good risks are having trouble finding affordable insurance coverage. While these cases may be anomalies, their number has grown and has created suspicion and undermined consumer and agent confidence.
“IIABA opposes efforts to ban the use of credit information or to unduly restrict its use. Agents and brokers prefer to see the industry revise its business practices so that the benefits of credit information can be obtained by both consumers and insurers,” Ahart continued. “We believe credit information can be used in a reasonable, consumer-friendly way—and we are calling on our company partners to reevaluate how they use credit information and adopt appropriate business practices.”