Regulation and competition should not be at odds with one another, as both share the same goals, a leading consumer group official argued here during the CPCU Society’s annual conference.
Both regulation and competition have the same ultimate objectives–to provide wide availability of good coverage at the lowest possible price, consistent with a fair return for insurers, according to Travis Plunkett, legislative director of the Consumer Federation of America.
A recent CFA study found that states with effective regulatory regimes have accomplished this balancing act, said Mr. Plunkett, who cited California as an example. States with effective regulation, he added, have spurred competition, kept rates low and delivered profitable bottom lines for insurance companies.
Conversely, he said, states with weak regulatory regimes have seen more market concentration, higher rates and unjustifiable industry profits.
He said the study also found that in states that require pre-approval of rates, prices over the last 20 years have risen more slowly than in states that do not require pre-approval. Pre-approval states also performed well in competitiveness and in generating profits for insurers, he added.
Mr. Plunkett stressed that both regulation and competition can be abused, citing refusal by regulators to approve necessary rate increases over many years as a potential example.
However, insurers developing rating schemes that adversely affect lower-income consumers is abuse of competition, he added. As an example, he mentioned that in Florida, reinsurance costs that were passed through to consumers turned out to be five-to-10 times more than reinsurers’ own internal models said they should be.
He also criticized the industry for not focusing on creative new ways to lower risks. He said insurers used to have a strong track record of this but today have moved toward the use of classes that do not allow consumers to take steps to improve safety and lower their rates. He cited credit scoring, education and occupation, and previous liability limits as examples.
John Lobert, senior vice president of state government relations for the Property Casualty Insurers Association of America, countered that less government involvement and healthy competition is a more effective way to regulate the industry.
He said when insurance regulation first came about, there were serious problems in insurance–such as companies that were not sufficiently capitalized, and agents selling policies that were not backed up by any carriers. Regulation was needed, he explained, to make sure promises were kept.
Today, however, Mr. Lobert said insurers are still viewed as “bad guys,” and he called on regulators to stop portraying the industry that way. He said that no insurance company could succeed by having a reputation of mistreating policyholders.
Companies may get away with bad practices for a little while, he said, but they will quickly lose market share, agents and business. He conceded that the market does experience occasional hiccups, and sometimes there are bad individuals in the industry, but overall, he said, insurers have nothing to gain long-term by bad behavior.
Regulators, Mr. Lobert suggested, should concentrate on making sure insurers fulfill their promises. Beyond that, he called a competitive marketplace the best regulator of price.
He said that much of the market dysfunction that does occur is because of actions by courts, legislators and regulators that lead to sudden environmental liabilities, bad-faith laws, or new exposures that impact the industry.
Other panelists in the CPCU debate–including James Byrd, from the South Carolina Department of Insurance, and Tom Ahart, a former president of the Independent Insurance Agents and Brokers of America and president of Ahart Frinzi and Smith, a New Jersey-based agency–supported market-based approaches to regulation by talking about how harmful overregulation adversely impacts the market in their respective states.
Insurers, they said, began to leave both states because of restrictive markets that imposed such rules as “take all comers,” and, in New Jersey, an “excessive profits” law. They explained how encouraging competition and allowing companies to bring their rating strategies to the market led to more comprehensive coverage, lower rates and more choices for consumers.