Insurance is a promise. The consumer buys a guarantee by purchasing a contract, hoping they will not need it. Insurance companies fashion their mission statements for their intangible product with statements like: “protecting people, businesses, and futures with extraordinary care” and “[helping] people manage the risks of everyday life, recover from the unexpected, and realize their dreams.” However, little known is the role of policy in insurance. Policy influences whether the consumer is able to obtain insurance to realize their future dreams or even to sleep in peace.
Insurance is considered a nonbanking financial service (NBFS) and is primarily regulated at the state level. The McCarran-Ferguson Act determined that insurance is subject to the laws of the state for a majority of the regulations covering licensing, insolvency, and rate regulation. State policies are geared towards non-health insurance. Federal regulations tend to apply to health insurance and life insurance due to their government programs and investment products structure. Regardless of whether it comes from the state or federal government, these policies directly impact the consumer.
One of the more tangible aspects of insurance for consumers are premiums, which are based on many factors, and individual state policy determines which factors are approved for use. For auto insurance, every state but California and Michigan have policies in place authorizing the use of zip codes as a rate determinant. Zip codes are used to understand population density, which predicts accident frequency and higher crime rates, both of which lead to higher claims costs. In California and Michigan, legislative rules prevent the insurer from accurately rating a risk, which could lead to higher premiums.
Availability is another key aspect of the importance of policy to the consumer. Insurance availability has been a concern in recent years as the industry has been battling a hard market. Premiums rose 8.8% for homeowners in 2022-2023. A hard market is difficult for insurance companies to navigate, and consumers will feel pressure, too. However, regulations aimed at protecting consumers should be careful not to cut access.
In 2024, Georgia passed H.B. 221 requiring insurers to approve rate changes for private auto insurance with the state. The state has up to 45 days to review the rate filing and approve or deny the request. However, such delays prevent insurers from instituting timely rate increases to match risk. At the time this bill was passed, Georgia was battling a high auto loss ratio in the state, meaning auto claims rivaled the amount of earned premiums.
Lack of access is also running rampant in the state of California thanks to policies instituted by Proposition 103, California’s notorious insurance regulation. California regulation has been criticized for restricting the insurer’s ability to price effectively causing many insurers to limit writing new risks or pull out of the state altogether. The consumer has paid the price. The availability of insurance is challenged by policies requiring insurers to go through time-consuming hoops to be profitable in the state.
Sound policies allow for market competition. Affordability and availability are determined by restrictions and are influenced by public policy. The consumer needs to have insurance availability and insurers need to have room to price their product effectively to create marketplace competition.
Leah Locke is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.