Car insurance rates and state controls

There's a very interesting political battle being fought in many states and, although to some extent it goes along party lines, even the GOP states can see the sense in imposing some controls over the way in which insurers set their rates. Traditionally, the Democrats have favored a consumer-protection approach, setting up a regulatory framework for the local Insurance Commissioner to police the market and fine the insurers if they act unfairly to their policyholders. The GOP would like to run their states based on entirely free competition. The theory says the efficient companies will survive and the bad companies will be driven out of business. Except, as if by telepathy, most companies in a state tend to charge about the same average premium rates and offer highly comparable levels of service. This means there's very little to choose between companies and few are obviously "bad". Yet without controls, these same companies routinely increase their rates by more than inflation, a practice many electors consider gouging in the present recession. With many electors being drivers, this makes premium rates a political issue and forces even the most hardline Republicans to impose some level of market regulation.

One of the states where the debate has been most fiercely fought is Massachusetts. Until 2008, this state tightly controlled the rates all insurers could charge. But Governor Deval Patrick was not convinced there was enough competition and so, apart from the state's controls, little incentive for the insurers to offer an efficient service. He therefore introduced new rules for managed competition. This allowed more freedom to the insurers in setting the rates. As a result, the number of insurance companies increased from nineteen to thirty-three and the premium rates fell for the first two years. Although there was an increase of 4% last year, the average rates are still lower than they were three years ago without allowing for inflation. The state government hails this as a major success.

As in most states, the reason why moving to managed competition has not produced bigger savings for consumers is because of their marked reluctance to change insurers. The same insurers who were dominant before the reforms remain dominant. This is not because they necessarily have better service standards or charge the cheapest rates. It's simply because most people are reluctant to change to new insurers. This lack of rationality on the part of consumers is a major stumbling block for all reformers. The free market is supposed to be based on competition so politicians give the people competition. Except the people refuse to accept their new freedom to choose different suppliers. In such cases, the insurers have no need to compete. Losing two or three percent of an existing business to new insurers is not going to change the dominant company's behavior. It will only change if its financial position is genuinely threatened. So, when you vote in your state, remember to act on the good things a politician might give you. Car insurance rates are not fixed in stone. They move to match market forces. So when you are looking through the next set of car insurance quotes and see cheaper rates from other companies, remember the old saying, God helps those who help themselves.


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