Beware of insurance regulation
After reviewing the recent Post and Courier articles by Tony Bartelme and reading about the number of people calling for insurance price regulation, it brought to mind a quote from President Ronald Reagan came to mind — “The most terrifying words in the English language are: I’m from the government and I’m here to help.”
While on the surface it may be tempting to believe that government will always look out for consumers and will make our lives better, the unintended consequences show otherwise.
While consumer protections are very important, industry price regulation is a terrible idea and one that will make consumers much worse off. To see this, we only need to look back to the one-time price regulations that affected the trucking, railroads, airlines, long distance telephone and brokerage services. Some may recall that it used to cost hundreds of dollars to buy a share of stock, but today you can do it online for $8. In 1970, the Interstate Commerce Commission forced interstate trucks to return empty from a delivery, resulting in higher transportation costs and higher prices for consumers.
Four decades ago, the average consumer never flew by airplane, except for business. In 1980, long distance service was a steal at 35 cents a minute, but today it is free with some Internet-based telephone services.
Ending price regulation for these industries resulted in dramatically lower consumer prices — collectively saving about $100 billion per year, according to a number of well-accepted economic studies.
So why will regulating insurance prices work? It won’t. For starters, a study by the American Consumer Institute found that, after adjusting for hurricane exposure and other factors, U.S. consumers pay $15 billion more per year for insurance — just because of excessive state insurance regulations. For example, Texas and Florida are the most price-regulated markets, but they also have the highest insurance prices. It is no coincidence.
Florida has tried to artificially lower its insurance prices and, in the process, created a dysfunctional market that drove healthy well-capitalized insurers out of the state, leaving weaker and smaller insurers to fill the void. The result of shortages forced Florida to add its own state-run insurance — now the biggest homeowner insurer in the state — and later add its own reinsurance company. Well, how has this worked out for Florida?
Fifteen years ago, Florida’s homeowner insurance premiums averaged 30 percent higher than the U.S. average, but today Floridians are paying nearly 90 percent more, according to data from the National Association of Insurance Commissioners. Last year, Florida was a leader in insurance company insolvencies (yes, insurers that could not pay consumer claims). Moreover, Florida’s state-run insurance program and its state-run catastrophic fund are so undercapitalized that they could be underwater after just one major storm — despite the fact that Florida has not had a hurricane in the last six years. Ah, the success of price regulation.
The Post and Courier articles correctly point out that insurance policies on the coast are a lot more expensive than inland policies, but these prices are based on risk. South Carolina has 41 percent of its population on the coast, higher than Georgia (10 percent) and North Carolina (24 percent). The simple fact that a higher percentage of consumers live near South Carolina’s coast explains much of the difference in rates. So far, the new regulatory model appears superior to the old. Under the current flex-rate plan established in 2007, the rate of increase in total premiums has slowed by 60 percent. The S.C. insurance market is doing fine.
Regulation is needed to protect consumers against insolvency. The irony of price regulation is that it flirts with insolvency. Demonizing the insurance industry may be a short-term political strategy, but it’s a reckless one, because solvency regulation is much more important than price regulation.
With about 120 insurance companies in the state, a better strategy would be to encourage consumers to shop and compare, which would encourage price competition and produce real benefits for consumers.
As a coastal homeowner myself, I would pick competition over government central planning.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, headquartered in Washington, D.C.