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When it comes to automobile insurance, the prospects for New Jersey’s consumers are bleak. Unlike many states, New Jersey’s insurance market remains mired in regulation that leaves consumers few real options in the marketplace. Four of the six largest insurers in the nation have pulled out of New Jersey, and one more is filing the paperwork to do so. Clearly, a system that drives out the major insurers does not serve consumers well. Unless New Jersey sheds its unwieldy insurance system, consumers will continue to face a shrinking set of options. Customer choice and competition have brought dramatic changes to insurance markets in other states; those states still clinging to regulation need to re-examine the role of markets.
A recent survey found that in New Jersey 17 percent of consumers believe that automobile insurance is the most important problem they face, while in other states only 1 percent of consumers rate automobile insurance as a significant problem. This stark contrast is informative. The malfunctioning insurance market in New Jersey is the product of 30 years of regulatory tinkering. Layer after layer of restrictions and mandates have taken their toll, destroying any sense of a “market” for insurance in New Jersey. While consumers in other states enjoy real choice when it comes to choosing an insurance carrier, New Jersey’s residents are left with, for the lack of a better term, a Soviet-style economic experiment that is failing in true Soviet fashion.
Economists have long known that centrally planned economies cannot work, a conclusion made evident to the world when the Berlin Wall came down. Markets have proved to be much more effective at allocating society’s resources, and insurance is no exception. Rather than attempting more regulation to fine-tune a failed regulatory structure, a better option would be to inject some real competition into New Jersey. Reform should strive to open the market for insurance, with a clear objective to provide consumers the widest possible choice of insurance carriers. A sensible market for insurance would attract insurers to the state, not repel them. And as insurers return, consumer choice increases.
The prospect of a more competitive insurance market offers a real potential for consumer gain. Academic and government studies have long demonstrated the positive effects of competition. Moreover, technological advances, financial services deregulation, and more effective risk management tools have allowed market innovations that provide an even greater degree of competition for insurance. And in a more open regulatory system, insurers have the flexibility provide a wider range of products to more precisely meet the needs of individual consumers.
For example, South Carolina was also a state with a long history of active intervention into the insurance market. After almost 30 years of heavily regulating the auto insurance market, South Carolina was confronted with a market that exhibited all symptoms of failure: Consumer dissatisfaction, a shrinking pool of insurers, and a large role for the state, which was forced to find coverage for those consumers who had no options left in the marketplace. Finally, in 1999, South Carolina opted to scrap the regulatory mess altogether and try a more competitive approach. The results are promising: More insurers have entered the market in South Carolina, consumer policy choices have expanded and the state’s role in market has shrunk considerably.
Competition provides the discipline necessary to drive market performance. In a market that has no barriers to entry, insurance providers will act competitively in order to maximize profits. The insurance industry has been identified as competitive by numerous studies, and the costs of the regulatory regime have also been identified. Nonetheless, efforts to introduce competition have been slow. But it has been regulatory barriers, not market barriers that have limited competition.
If consumers are to find relief from costly insurance provided by a shrinking pool of insurers, New Jersey must establish a true market for insurance. Across the nation, more states are turning to competition to address problems in the insurance market, with positive results. By any economic measure, insurance markets are competitive. Eliminating archaic regulations that restrict choice is an important step toward helping the consumers of New Jersey. For too long, New Jersey’s consumers have been the victims of an experiment in economic planning that has gone horribly wrong. The current system of insurance regulation has choked competition and driven providers out of the state. Rather than another round of regulatory “fixes,” New Jersey needs to seriously consider a more competitive alternative for automobile insurance.
Today, there is little economic justification for the “natural monopoly” theory that insurance can only be provided efficiently in a regulated industry. Indeed, even a historical survey of the early years of insurance finds the market highly competitive. This is hardly symptomatic of anti-competitive behavior. As technology and underwriting have improved, insurers have reduced costs and identified new products that more closely fit the needs of individual consumers. Yet the current regulatory regime continues to limit the ability of insurance providers to implement innovations in ways that help consumers.