Auto Insurance Regulation - What Works 2019 | Consumer Federation of America 19
liability premiums only, where the nation’s most rigorous regulatory system – in California –
saw premiums that are lower than they were in 1989, even as the nation’s premiums rose by
nearly 60 percent. In both tests of rates, Prior Approval states taken together saw the smallest
increases and while the more weakly overseen flex and deregulated states allowed for the largest
rate increase during the nearly three decades reviewed.
Next, we examined insurer profitability as a function of regulatory system. Although
premium increases were significantly below average in prior approval states, profits were not.
The experience of insurers across the country suggests that the role of consumer protection rules
was to improve efficiency rather than draw down company profits. Prior approval regulation, it
appears, serves as a stabilizing force that allows companies to succeed even as it protects
consumers from excessive pricing. At the very least, the profitability results demonstrate that
prior approval oversight of insurance companies cannot be seen as an inhibitor of insurance
company success. Further, it is evident that in all cases and under any regulatory system, insurers
have generally thrived over the decades, enjoying reasonable profitability in virtually every state.
Finally, we tested the competitiveness of markets under each system of regulation and
found that prior approval regulation yielded, on a weighted average, the most competitive
insurance markets. The less regulated states, including the various flex systems and deregulated
Wyoming, exhibited much weaker levels of competition. There is some irony that deregulated
insurance markets are sometimes described as “Competitive States,” when, in fact, weak
regulation more closely correlates with highly concentrated markets than with competition.
Overall, the Prior Approval system of regulation works best for consumers. This system
is superior at holding prices down while allowing reasonable insurer profits and maintaining a
competitive market. It is also clear that the worst regulatory regimes for consumers are the
Deregulated and Flexible Rating systems, which do not hold down prices, foster less competitive
markets and often allow higher than average profits to insurers.
We also analyzed data on several other key factors that could affect insurance rates,
including seatbelt laws, bad faith claims settlement laws, uninsured motorist population, size of
the residual market, the legal regime in use for auto claims, thefts, traffic density, disposable
income, repair costs and other factors, as shown in the appendices. These data do not appear to
be confounding variables and instead help us affirm the first general finding that Prior Approval
regulation is the best system for consumers. Additionally, as discussed below, the data shed light
on the second significant finding of this analysis, that California’s active prior approval system
has consistently proven itself the strongest in the nation in ensuring access to reasonably priced
auto insurance rates.