By Dr. Joseph P. Fuhr, Jr.
If one thing stands out from recent news reports on auto insurance in Georgia, it’s that economic regulation and rate review are not needed to protect the state’s consumers from rate gouging.
With nearly 90 auto insurance providers in the state, Georgia consumers enjoy more competition and choice of auto insurance plans than they do for most other goods and services. Where else can Georgia shoppers find so many choices – food, housing, medical care, telephone service? The ability of consumers to shop, choose and switch will lead to overall competitive rate levels with no suggestion of monopoly profits.
The state’s auto insurance markets do not show characteristics of natural monopoly, unfair competition or other market infirmities traditionally indicative of a need for price regulation. Given the lack of evidence of current market failure, the absence of delay, uncertainty and regulatory arbitrariness for insurers and customers will create value for consumers. All one Georgian needed to do to get a lower rate, as the Atlanta Journal-Constitution’s James Salzer reported in a Dec. 7 article, “Rates up for Auto Insurance,” was switch insurance providers.
That rates were rising even before price regulation ended in October indicates that claim costs, rather than regulatory changes, are driving rate trends. This is reflected in the fact that some rates are going down (notably the largest Georgia provider) while others are going up. Competition is at work, bringing the structure of rates into line with the structure of claims and other costs, thereby ridding the system of implicit taxes on some Georgians to subsidize others.
If some drivers “deserve” a subsidy, the state should implement direct income transfers, not hidden taxes in the form of higher rates for “less deserving” Georgians, whoever they might be. Good drivers should not be forced to subsidize bad drivers; high-risk drivers should pay higher rates to offset the higher claims costs that they impose on the system. Such a policy should reduce the average premium of drivers and encourage safer driving.
Despite the presumption of innocence or lawfulness widely embedded in the U.S. legal standards, Georgia law previously put the burden of proof on insurers. Given the competitive nature of the industry, “filing costs” – the costs of delay, pricing inefficiencies, uncertainty, paperwork, administrative costs and compliance costs – are assured to be passed onto consumers in the form of higher rates. Rate regulation is not free. In that context, it should not be surprising that requests for rate changes increased after the law was implemented. These costs are avoided in the new environment; undoubtedly, many such requests were put on hold until the new law was enacted.
It is important to note that before the law was amended, insurers were reluctant to reduce rates, knowing that if they needed to raise rates these increases would be greater due to a lower rate base. Thus, the old rules very likely forced some insurers to charge higher prices to some consumers than they will be charging in the new environment.
Two months do not establish a long-term trend. However, the evidence in Georgia to date, combined with the experience of states with and without requirements for rate change approvals, indicates that rivalry among insurers will lead to normal profits, cost-based premiums and efforts by insurers to improve service quality as a means of increasing market share.
Competition among providers is sufficient to protect consumers from excessive and unfair rates, but it is not adequate to protect them from risks associated with provider insolvency or potentially abusive trade practices. Insurance by definition involves substantial risks. These are pooled, shared and managed by providers. Individual policy holders have no way to assess provider business methods or financial strength. They do not have sufficient information to make complex determinations of risk in comparison to price, other service attributes or fine contractual print and are generally exposed to providers’ refusal to honor claims, misrepresentations and other consumer abuses. The current national financial crisis in credit markets is, in significant measure, the result of failure of firms to manage risk. Here, there is a clear consumer protection role for government officials. As for determining price in Georgia, the evidence is clear: Competition favors the consumer.
Dr. Joseph P. Fuhr, Jr. is Professor of Economics at Widener University, a Senior Fellow at The American Consumer Institute and an Adjunct Scholar at the Georgia Public Policy Foundation. The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (January 9, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.