New Article Reportedly Confirms Earlier Findings Regarding Government Price Controls for Insurance

September 21, 2004

A recent report produced by Milliman Inc. has reportedly confirmed findings from its earlier study regarding California’s Proposition 103, which instituted a system of rigid price regulation for insurance products.

The new paper, Revisiting the Lingering Myths About Proposition 103, concludes that the kind of stringent rate regulation mandated by Prop. 103 does not provide benefits to consumers in the form of lower insurance rates.

Prop. 103 has resurfaced recently in discussions about insurance regulatory modernization. The House Financial Services Committee recently released a draft proposal called the “State Modernization and Regulatory Transparency” (SMART) Act, which is reportedly receiving considerable attention. In addition, the Senate Banking Committee is
conducting a hearing (Wed., Sept. 22 at 2 p.m.) on this subject.

These are reportedly just two recent examples of the focus on insurance regulatory modernization, which seem to have spurred renewed interest in Prop. 103 among some entities.

The new report said, “There is a well-established consensus among scholars of insurance regulation that government regulation of the prices of insurance products reduces consumer welfare and stability in the insurance marketplace.”

Despite this consensus, however, a small minority of stakeholders reportedly continue to maintain that certain state price control regimes, such as California’s Proposition 103, are more beneficial to consumers than a market-based approach and provide a better regulatory model for policymakers to consider.

According to the Milliman report’s findings, however, “While proponents of government price controls have continued to insist that Proposition 103 was responsible for bringing down auto insurance premiums in California, we found that other factors related to reducing exorbitant liability costs actually brought down loss costs and led to
decreasing premiums.”

The report also concluded, “it is critical that policymakers appreciate the nature of competition and the market process when thinking about regulatory modernization of the insurance marketplace. The interaction of hundreds of firms in a competitive market in setting prices is to be preferred to that of a single regulatory authority, who can be influenced by political considerations. It is to the benefit of all that the costs of insurance be quickly and appropriately reflected in the prices that are paid by consumers. Attempts to micromanage the dynamic competitive market process can make consumers worse off
than simply letting the marketplace perform the positive role it can play in a free society.”

Revisiting the Lingering Myths About Proposition 103 was sponsored by the American Insurance Association, the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America. The sponsors of the report believe that we live in a new era of global markets and financial services modernization which are propelling insurance regulatory reform. The current system often employs government price controls that discourage competition. Reportedly adopting a more “free market” approach to insurance regulation would permit competitive forces to respond to consumer demand and would bring greater uniformity, certainty, and speed to the regulatory system as well as lower costs for consumers.

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