Who’s Watching the Watchdog?

There was a time when consumers regularly depended on private insurance coverage to protect our cars and homes against the unexpected occurrence of a major loss. But, there has been a growing threat to consumers. That consumer threat, however, is not posed by private insurance carriers, who are demonized as price-gougers, profiteers and goliaths; that threat comes from the very state watchdogs entrusted to regulate these carriers. Policymakers and regulators have created an illusion that insurance markets are failing and that state insurance monopolies would produce better outcomes than competition. But, nothing could be further from the truth.

The trend toward state monopoly is clear and consumers need to hold onto their wallets. Citizens Property Insurance Corporation (CPIC), the state-operated insurance company, has become the largest insurance company and is well on its way to capturing 50% of the market. This has been done by unprofitably providing insurance below cost. It is just one or two major storms away from picking taxpayers’ pockets in what will be a multi-billion dollar bailout.

The recent announcement by State Farm (Miami Herald, “State Farm Wants to Dump Home Insurance in Florida,” January 17, 2008), the largest private property insurer, to withdraw from Florida gives further evidence of regulatory malpractice in the state. A study by the American Consumer Institute (ACI) found that, after adjusting for hurricane exposure and other factors, Florida insurance consumers pay $300 more (annually per household) for insurance – just because of the excessive state insurance regulation. As regulatory costs go up, insurance carriers try to raise their prices. And, when price increases are denied, carriers exit the market, bequeathing its future losses to the unprofitable state-operated CPIC.

When the insurance commissioner decided to suspended Allstate, the state Governor called the decision “a beautiful thing” (Miami Herald, “Court Upholds Allstate Suspension,” May 15, 2008). But, beauty is in the eye of the beholder. As private insurers are driven out of the market, competition decreases, regulations increase and consumers lose, but Florida’s state-owned insurance monopoly grows, as does its losses. So, when the Florida insurance commissioner orders insurance companies to stop writing policies and others try to exit the market altogether, it is not looking out for consumers; it is looking out for its own monopoly interests. In the end, consumers will have higher insurance prices and less choice – not a “beautiful” picture.

So who’s watching the watchdog? As the state regulatory watchdog slowly monopolizes the insurance market, the end result will not be good for consumers. GMU Professors Bennett and Johnson, as well as other economists, have shown that government provision of private services comes at an immense price – usually twice the cost of private provision. That’s right. Empirical evidence shows that – if you have government enterprises run the airlines, provide electricity service, pick-up your trash or process your insurance claim – it will cost consumers twice as much, compared to private enterprise. The reason is simple – government enterprises are not subject to market pressures that lower costs and government enterprises are less sensitive to consumer needs. Finally, government monopolies also don’t go out of business, which is why Florida taxpayers will eventually be asked to pay the difference.

On the other hand, private enterprises need to be as efficient as possible in order to stay ahead of their competition and produce a profit for all of their efforts. If they can’t cover their costs, they will leave the market; and that, thanks to a stifling regulatory environment, is what has happened here with the exit of State Farm. Having an unprofitable government enterprise pick-up the pieces is a second-best solution.

Steve Pociask is president of ACI and Dr. Joseph Fuhr is a Senior Fellow at ACI, as well as professor of economics at Weidner University.
To read more about this subject, read our op-ed in the Orlando Sentinel.