CFA Study Off-base, Industry Says

You don’t have to be involved in the property/casualty insurance industry long to become acquainted with the many studies that are released each year on rating systems, from both consumer and industry groups. The Consumer Federation of America (CFA) recently released a report on prior approval of rates. J. Robert Hunter, CFA president and a former Texas insurance commissioner, says the study shows that auto insurance rates have risen more slowly during the last two decades in the 15 states that require advance regulatory approval of rate increases.

Hunter expands his conclusion, stating that prior approval also “spurs competition and generates significant profits for insurers.” Hunter says the top-performing state in keeping rates down and providing comprehensive consumer protections is California, which requires prior approval of rate hikes.

“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,” Hunter said .

Many national insurance company trade groups representing insurance companies immediately rebutted the study’s conclusions.

“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 of the Property Casualty Insurers Association of America (PCI).

Neil Alldredge, vice president for state and regulatory affairs for the National Association of Mutual Insurance Companies (NAMIC), also questioned the study’s validity.

“Prior approval laws, such as those found in California and New York, harm consumers by keeping rates high and discouraging competition.”

Alldredge said the study claims 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.”

For more give and take on this topic, see “Consumer Federation says prior approval works, industry says not true” on page 70 of this issue of Insurance Journal – South Central.