Government Control vs Competition

Maintaining a Proper Balance

Traditionally, regulators have been guided by the general goals of general car insurance premiums regulation set out in state statutes which charge them with two duties: 1) preserving the long- term solvency of insurance companies and 2) protecting insurance consumers from unfair and inequitable treatment.

This precept would include protection against excessive rates and unfair rate discrimination (where the difference in premiums betwTeen groups of insurance buyers is not commensurate writh cost differences).

Maintaining a balance between two seemingly conflicting concerns, adequacy and fairness, is beneficial to both consumers and insurers. Consumers benefit from rate adequacy to the extent that they are protected from the loss of value that a policy suffers when an insurers ability to pay future claims is in doubt. They also benefit from rates that are not excessive. Insurance companies benefit from rate adequacy in that revenues will be sufficient to assure long-term solvency. Excessive rates would also be to insurers’ detriment in that consumers would increasingly choose alternatives, such as self- insurance.

Regulators seek to achieve this balance differently under different regulatory systems. Competitive systems, which rely on market forces to set rates, implicitly assume that the insurance industry is sufficiently competitive that no firm will charge excessive rates, lest it lose market share, or inadequate rates, lest it jeopardize its financial health. Prior approval systems, on the other hand, assume that the state must intervene to ensure the balance between adequate and excessive rates.

Under an active price control system, such as prior approval, this balance may be difficult, if not impossible, to maintain. For example, political pressures to provide low cost insurance may lead to a tendency toward inadequacy until insurer insolvencies reach serious proportions. Regulatory lag, the extra time required for prior approval to react to changes in supply and demand, has been shown to affect the balance issue since it causes inadequate rates in times of high inflation and excessive rates during deflationary periods.

Affordability and Availability

Though not explicitly set out in statutes, regulation has become increasingly concerned with issues of affordability and availability of insurance. These goals are difficult to pursue since what is considered affordable is a value judgment based upon lifestyle as well as income.

In addition, the pursuit of these two goals may jeopardize achievement of the two others: adequacy and fairness.

States have addressed concerns that insurance be affordable and available in many different ways. These include rate caps and creation of cross-subsidies between different risk classes through limitations on rating variables, such as territory in the case of auto insurance.


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