Washington, D.C. – The Consumer Federation of America (CFA) today released a detailed, national study of automobile insurance regulation over the last two decades that found that rates have risen more slowly in the fifteen states that require insurers to receive advance approval of rate increases from the state.  States with “prior approval” regulation also performed well in spurring competition and generating significant profits for insurers.  The top-performing state in keeping rates down and providing comprehensive consumer protections was California.  Among the worst performing states were those with weak or no regulation of rates at all.  These states had the steepest rate increases, less competitive markets and among the highest profits for insurers.

The CFA study is being released as the insurance industry continues to press both Congress and the states to dramatically weaken insurance consumer protections, particularly the oversight of rates that companies charge.  The report demonstrates that these proposals will likely lead to higher rates, less competition and more insurer profits.

“It is very clear that consumers fare best under a system of prior approval of insurance rates.  Not only are rate changes held down, but competition is not dampened and profits are reasonable for the insurers,” said J. Robert Hunter, CFA’s Director of Insurance and a former federal and state insurance regulator.  “It is also clear that as regulation is weakened, insurance consumers are worse off, he said.”

The CFA study of automobile insurance regulation in all 50 states and the District of Columbia examined a number of factors that are important to consumers and insurers, including rate increases from 1989 through 2005, insurer profits from 1997 through 2005, as measured by return on net worth, and the current level of competition.

With the exception of the one state that mandates the rates insurers can charge, the fifteen states that require insurers to receive approval for rate changes before they go into effect had the smallest increase in rates (54 percent) from 1989 through 2005.  In fact, column 3 shows that the weaker the regulatory system, the greater the price increase consumers have faced.  States with a prior approval regime also had a similar level of competition and slightly lower insurer profits compared to states with different forms of regulation.  According to the widely used Herfindahl-Hirshman Index (HHI), states with prior approval rules have insurance markets that are on the border between competitive and moderately concentrated.  The states that provided the lowest level of consumer protection used the regulatory system known as “Competition,” in which the state has no authority to control rates.  These states had sharper rate increases, higher profits and greater market concentration than all other regulatory systems other than the one state that sets prices for insurers.

The states with highest profits for auto insurance from 1997 to 2006 were Hawaii (19.1 percent return on net worth, D.C. (14.9 percent), Connecticut (13.2 percent), New Hampshire (12.3 percent) and Vermont (12.3 percent).  Several of the lowest profit states, three of which had a lot of hurricane activity, were Louisiana (0.8 percent), Michigan (2.3 percent), Mississippi (3.7 percent), Nevada (4.0 percent) and Florida (4.7 percent).  Twenty three states, identified in the report, had reasonable returns of within 2 percent of the national average of 8.1 percent.

California Performs Best in Protecting Consumers

California’s regulatory system, which was adopted by state residents when they voted for Proposition 103 in 1988, performed well in virtually every category examined by the report, including all of the factors cited above.   Two exceptions were insurer profit levels over the longer term (1989 through 2006), which were somewhat high and a large population of uninsured motorists.  The California system’s positive results for consumers include the following:

• Generated estimated savings of $61.8 billion for consumers over the sixteen years that Proposition 103 has been in effect;
• First among all states in holding down rate increases (to 12.9 percent);
• Fourth in market competitiveness as measured by the HHI (716);
• The only state to totally repeal its antitrust exemption for automobile insurers;
• The only state to put reasonable limits on expenses passed through to consumers, such as fines and excessive executive salaries;
• Has a very low number of residents participating in higher cost “assigned risk” insurance plans;
• Among the eleven states with the highest ranking from the Insurance Institute for Highway Safety for strong seat belt laws;
• One of only four states that guarantees that good drivers can receive a policy that can be renewed from an insurer of their choosing;
• The only state to require that a person’s driving record is the most important factor in determining insurance rates, followed by the number of miles driven and years of driving experience. All other factors used by insurers must have less impact on rates than these criteria;
• One of only three states to ban the use of credit scoring for setting rates or granting coverage;
• The only state to require that insurers offer consumers the lowest price available from all of the companies in the insurer group;
• The only state that funds consumer participation in the ratemaking process if a substantial contribution is made.

Recommendations for Policymakers

As the findings of this study make clear, many states do a poor job of ensuring that insurance rates are fair, that the regulator adequately reviews rates, that competition is vigorous, and that consumers are adequately involved in the ratemaking process. This report also provides considerable evidence that the deregulatory proposals being promoted by the insurance industry at the state and federal level, especially the elimination of rate regulation, fail to protect consumers and to ensure fair rates.

• State policymakers should implement comprehensive regulatory changes modeled after Proposition 103. By combining close regulation of how rates are set with opportunities for vigorous competition and fair returns for insurers, Proposition 103 has established a 20-year track record of success for California consumers. In particular, state policymakers should adopt regulatory changes that achieve the following: stop excessive expenses from being passed on to consumers (like fines and excessive executive salaries); repeal state antitrust exemptions; require insurers to offer coverage to good drivers who are required by the state to purchase it; involve consumers actively in the rate setting process by funding consumer participation; set a state ratemaking model by which the regulator evaluates rate proposals by insurers, and establishes key ratemaking parameters, such as reasonable rates of return.
• The National Association of Insurance Commissioners should not adopt insurer proposals to deregulate auto insurance. This report shows that tight regulation of insurance rates and classifications leads to lower and fairer rates for consumers.
• Congress should reject efforts to weaken regulation of insurance in the few states that do it well, whether through the adoption of an “optional federal charter” or other means. Optional federal charter proposals introduced in Congress grant the federal regulator little, if any, authority to regulate price or products, regardless of how non-competitive the market might be for a particular line of insurance.  Granting insurance companies the right to choose whether they are regulated at the state or federal level will lead to “competition” between regulators to lower consumer protection standards. If Congress is serious about improving the quality of insurance regulation for consumers, it should consider mandating that states meet minimum, uniform standards of regulation based on the innovations included in Proposition 103.