Illinois Insurance

The extensive over-regulation of automobile insurance rates in some states shines a spotlight on the potential benefits of a market-driven approach to oversight, Independent Insurance Agents of America (IIAA), President-elect Thomas B. Ahart told Congress today.

Ahart testified at an Oversight and Investigations Subcommittee of the Financial Services Committee hearing. He stated that it is IIAA’s desire to identify mechanisms that can make the insurance regulatory requirements among the states as uniform as possible while retaining flexibility to accommodate differing local, state and regional needs.

According to the IIAA, auto insurance rates are regulated in 49 states. Of those, 31 have a prior approval system requiring carriers to file for approval rates with the state commissioner before using them in the marketplace. In the remaining states, insurers can change prices without prior approval, but usually must file the insurance rates with the commissioner who can disapprove them subsequently. Only Illinois does not allow disapproval.

Citing problems with the rate regulation systems in New Jersey and Massachusetts, Ahart said the regulatory approach of these states is motivated by the political desire to minimize insurance rates. ”

The IIAA quoted a study by the American Enterprise Institute-Brookings Institution Joint Center for Regulatory Studies, which found that “state regulation of the $ 120 one billion annual auto insurance market does not significantly decrease prices for consumers” but instead “generally reduces the availability of coverage increases and price volatility. Conversely, this study found that “there is no evidence that prices or profits in states that rely on markets to set rates that are excessive or behave collusively insurers.

Excessive rate regulation, the AEI-Brookings study found, “often results in removal rate, meaning that the total amount of premiums collected in a state is less than would be collected under competition, resulting in a decline in the market value of equity insurer. “Indeed, in Massachusetts and New Jersey, dozens of auto insurers have withdrawn from the market because the approved rates in these states are grossly inadequate.

Ahart testified that for more than 20 years, New Jersey drivers have paid the highest auto insurance premiums in the U.S. He added that state officials were hopeful that a series of statutory reforms enacted in 1998, including a provision that mandated a 15 percent across the board reduction rate, would ease automobile insurance premium levels.

Looking closely at New Jersey regulation, Ahart noted that the state’s regulatory process is hindered by three burdensome requirements. First, insurers can not earn more than 6 percent of their profits from sales of auto insurance policies over any three-year period. If a carrier does, it is required to return the “excess” profits to its insureds. Second, insurers are required to take all comers. “This requirement inevitably results in good drivers subsidizing bad drivers, without paying higher premiums to make up for the shortfall. Third, New Jersey has imposed a territorial cap rate since the mid-’80s that limits rates in high-risk areas to 35 percent over the state average. The law essentially caps rates in urban areas and rural and suburban forces drivers to subsidize the difference through higher premiums.

Ahart stressed that the enactment of the 1998 reforms has, unfortunately, led to the departure of carriers that had insured over 25 percent of all New Jersey drivers.

Ahart said more carriers would have abandoned the state’s auto insurance market if they were not required to give up their licenses to offer all types of property-casualty insurance within the state.

In contrast, Ahart noted, efforts to streamline oversight process and the rate in Illinois South Carolina have resulted in dozens of new carriers and the reduction of insurance costs for many drivers.

Illinois has no rate regulation. Even though Illinois is highly industrialized urban center with the massive Chicago, Illinois drivers pay premiums are consistently ranked in the middle among all states.

Also, the Illinois auto insurance market is currently served by carriers as many as any other state. A South Carolina rate deregulation law enacted in 1999 there has drivers paying $ 80 less per year and has dropped from the state in the 26th nation to the auto insurance rates to 38th. Also, over 100 new carriers have entered the state’s auto insurance market, Ahart noted.