While solvency protection, better consumer information and consumer protections are very important aspects of private automobile insurance regulation, a wide range of price regulations – such as prior approval, “file and use” and “use and file” – have persisted across the states with questionable results and benefits for consumers. The concern this raises is whether consumers are better off in states with more regulation or whether they are better off in the states with less regulation? In a search for the market failures that would justify the varying degrees of price regulation among the states, the following common questions arise:
- Is the industry competitive?
- Can regulators set prices better than the market?
- Does regulation lead to lower consumer prices?
- Does regulation reduce insurance industry profits?
A new study – Does State Private Passenger Automobile Price Regulation Benefit Consumers? The Myths and Facts – released by the American Consumer Institute finds that the common justifications for price regulation of automobile insurance are without economic and empirical support. The study analyzes industry prices and finds that unregulated insurance companies set prices better — and at significantly lower prices — than insurance companies in regulated markets. The study’s analysis also finds that unregulated insurance markets have profits that are not statistically different from those in regulated markets. In other words, in reviewing the common justifications for price regulation, this study finds no apparent benefit from such regulation, and, as the study points out, there may be significant adverse consequences to consumers from price regulation. Therefore, while some consumer protections and regulations are needed, the study finds no economic rational or empirical evidence supporting the need for price regulation of private passenger automobile insurance. The study also finds no evidence of standard market failures that would justify price regulation and no measurable benefit to consumers from such regulation.
The study results suggest that regulatory reforms – ending price regulation and encouraging market entry – are needed to speed service competition, price competition, and consumer benefits. In addition, the results may have implications for homeowner insurance markets, where similar differences in price regulation exist. The results also provide insight into the proper form of regulation should a national insurance regulator be established. For a full copy of the reports see http://www.consumerinstitute.org/Final%20auto%20insurance%20regs.pdf.