Does auto insurance cost more in prior approval states?

Availability of direct auto insurance and state rating laws

As to effect of rating laws on direct auto insurance availability, the GAO report found that there was less insurance available in the voluntary market in prior approval states; the average percentage of insurance purchased through the involuntary market in competitive rating states was 1.92 percent versus 12.24 percent in noncompetitive rating states. Overall availability of insurance was unaffected by state rating laws because of the existence of assigned risk and other involuntary market plans.

The GAO report noted, in addition, that the goals of affordability and availability are totally interrelated. The report said, “Regulatory policies designed to make insurance more affordable by constraining rate increases or by subsidizing the cost of insurance in the involuntary market could threaten the profitability of insurers and create availability problems.”

In sum, the GAO study clearly indicated that generally auto insurance costs more in prior approval states. It also indicated that there was less availability of voluntary market insurance in prior approval states, but that the difference was made up by state insurance plans. The report did not consider the effect of rating regulation on insurer solvency or the question of the effect of prior approval versus open competition on the adequacy of rates or the issue of consumer satisfaction with the various kinds of rate regulation, all of which are vitally important questions that must be answered before reaching a satisfactory answer about which approach to rating is best.

Another study focuses on rate regulation not just in the area of auto insurance but in all lines.
In 1986, a comprehensive statistical study of the commercial insurance business was conducted by Phillip R. O’Connor and Kathleen A. Carlson on behalf of the Illinois Insurance Committee on Tort Reform to determine whether some forms of rate regulation are of greater benefit to consumers than others.

The 1986 study focused on insurance loss ratios, which represent the proportion of dollars which an insurer pays out in losses for each dollar of premiums received. For most lines of insurance loss ratios are considered the best measure of consumer value, because the higher the loss ratio the greater the amount of premium dollar being returned to the purchasers of insurance to pay for claims.

The 1986 study was updated to include in the 10-year period the two years, 1985 and 1986, of the “insurance liability crisis.” The update replicated the original findings: There is no statistical evidence that prior approval systems of rate regulation benefit consumers more than open competition systems of regulation. In fact, for one line of insurance, Other Liability, the evidence actually points in the other direction.


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