Federal Insurance Regulation Gets Boost from Academia

Posted 8/1/2008
By Robert L. Redding, Jr.

The American Enterprise Institute recently hosted a conference on the "Future of Insurance Regulation" in Washington, D.C. The conference was co-sponsored by the Brookings Institution and Georgia State University. Georgia State is home to the Center for Risk Management and Insurance Research.

Clearly, this was one of the most important national meetings for the collision industry in some time. For the last few election cycles, Congress has reviewed the current state insurance regulatory system. Bills have been introduced that offer an optional federal charter for insurers. Life insurance as a federal regulatory option has been most seriously considered. Some members of Congress fear that tampering with the current state regulatory structure for auto insurance could lead to higher rates for consumers.

The items of interest to collision repairers were in two general areas:

• The need for insurance regulatory policy reform

• State versus federal regulation of the insurance industry

Martin Grace, research associate director and Ph.D., of the Center for Risk Management and Insurance Research, presented a research paper titled "Insurance Regulation: The Need for Policy Reform." At the core of the paper was a study of insurers from 1945 to 2006. Grace wrote, "There has been a 25-fold increase in property-casualty insurance premiums and a 10-fold increase in life and annuity premiums. In contrast, the U.S. population has just more than doubled over the same time period and automobiles per capita have increased about 2.5 times. The number of property-liability companies has increased about 4.5 times and the number of life insurers has increased about 3.5 times. Life industry assets have increased about 10-fold while the assets held by the property-liability industry have increased more than 130 times. Overall, the sale of life and non-life insurance products and their "coverage" of U.S. households and firms have greatly increased, along with the amount of assets managed by the insurance industry." Grace specifically pointed to the national aspect by noting, "For the property-liability industry, approximately 80 percent of its premiums are written by nationally significant companies."

Dr. Robert Litan of the Brookings Institution pointed to an increased sophistication of products offered by insurers. State regulators are not keeping up with the number and complexity of the products offered by insurers. State governments, specifically insurance departments, are unable to attract the quality of professionals that could be recruited by a new federal agency. Banking regulators, for example, have a much larger number of professionals in their regulatory work force than state insurance departments.

Litan's presentation also included commentary relative to a study regarding the federal
regulation of auto insurance. One of the points of discussion in Congress about federal regulation is that the market would set rates and not a government agency. This has produced some wariness among federal policymakers that auto insurance rates would increase under a new federal regulatory system. Litan makes the case that Congress should not fear federal auto insurance reform. According to his report:

"Economists who studied auto insurance regulation in the past have consistently concluded that rate regulation distorts the market, rewarding higher risk drivers who would pay more without rate controls at the expense of safer drivers who would pay less. The average effects - that is, the impact of rate regulation on the average consumer, or on all consumers in a given state - seem more ambiguous: while total insurance costs may be suppressed or reduced by rate regulation in the short run, they may be increased over the longer run. The presence of rate regulation can discourage insurers from lowering premiums when claims costs and expenses are falling. Further, the distortion in the rate structure due to regulation fails to discourage imprudent driving behavior of higher risk drivers. As a result, rate regulation can raise claims costs, and ultimately premiums, over the long run."

Speakers discussed the limited impact of the present-day McCarran-Ferguson Act exemption for insurers. It was pointed out that insurers seek to:

• Share loss data

• Establish common policy forms for consumers

A strong case was made that repeal or reform of McCarran-Ferguson would not bring true reform to the insurance regulatory system. Although consumer organizations have made clear that a repeal would help consumers, panelists differed as to the impact of a repeal. Grace's report stated, "However, since concentration measures and entry barriers in most markets are relatively low, it is difficult to see how the industry will be affected by repealing a rule that prevents collusion when the structure of insurance markets precludes collusion. During the last 20 years there have been numerous academic studies that demonstrate and conclude that insurance markets are highly competitive, as we have noted."

The Automotive Service Association supports the repeal of the McCarran-Ferguson Act. Legislation to repeal the Act was introduced in this Congress but has stalled in the U.S. Senate Judiciary Committee.

Although there have been hearings and limited legislative activity on insurance reform in this Congress, ASA anticipates Congress will attempt to move major reform legislation in the 111th Congress. It is critical that repairers push for property and casualty insurance to be included in a mandatory federal insurance regulatory system. Optional federal regulatory systems for life insurance only will provide no assistance for vehicle owners and collision repairers.

Collision repairers will have an opportunity to make their voices heard in the next Congress as to moving forward with the federal regulation of the insurance industry. State regulation has not benefited the collision repairer. Federal regulation will offer a more level playing field to determine property and casualty regulatory policy. It is important for collision repairers to unite and speak with one voice as to the federal regulation of the insurance industry.

To review more about the American Enterprise Institute Conference on "The Future of Insurance Regulation," please go to www.TakingtheHill.com.

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