Open competition benefits consumers to keep insurance prices down

Why Consumers Benefit from Competition for Direct Insurance

Another recent study confirming the view that open competition works to the benefit of consumers to keep direct insurance prices down is the California Insurance Department’s Study of the Availability and Affordability of Automobile Insurance in Los Angeles County.

According to the department data, during the three-year period beginning 1982, the industry incurred an 8.6 percent loss, which was offset by investment income of 11-13 percent. “It does not appear that the resultant profit is excessive,” the study noted. It concluded that “insurance rates charged by the major insurers are, in general, supported by their aggregate loss experience data.”

Open competition is often blamed for a lack of competition for the business of high risk drivers, but it is unclear that there is any causal relationship between the open competition system of rate regulation and the problems of affordability and availability for certain drivers. Free market competition by definition means that competitors may at any time make a business decision not to compete. Even under the most rigorous system of rate regulation, any private insurance company may simply decide that business conditions indicate its best business strategy is to leave that market, that is, not to compete.

Therefore, it is unclear that a system of rating regulation affects availability, and, indeed, this observation is borne out by the GAO study, which found that there was more voluntary market availability (and thus competition) in open competition than in prior approval states, but that rating regulation did not overall affect availability one way or the other due to the existence of state plans.

Finally, another study, discussed some of the important questions not addressed in the GAO study. These experts said that the two key barometers in comparing competitive versus noncompetitive rating are level of profitability and size of residual market. The report compared recent data under open competition in California to data about the highly-regulated states of Massachusetts, New Jersey and North Carolina.

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