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The following is the text of a speech given by CSE Foundation Counselor James C. Miller at the annual meeting of the American Legislative Exchange Council (ALEC), Chicago, Illinois, August 20, 1998.
Thank you for that kind introduction. I’m very pleased to have this opportunity to speak to you today. For a quarter of a century, ALEC has provided a unique perspective on the major issues of state government. I hope to continue in that vein today by offering some personal views on one of the states’ most important — and, I daresay, most misguided — regulatory activities. I refer to the pervasive system of price controls on insurance.
Long after other major industries were subjected to extensive deregulation, insurance remains so heavily regulated that elected officials, bureaucrats, and even industry executives still speak unflinchingly of the insurance "rate-setting process." That term is nothing more than a euphemism for government price controls. So today, when polls and focus groups reveal voter frustration over high insurance premiums, many state lawmakers instinctively react by promising to lower rates. After all, they have the power to do so, and it’s what they’ve always done in the past.
But ALEC members, who appreciate the virtues of free enterprise and limited government, know intuitively that price controls are economically unsound, and that they ultimately hurt the very people they are intended to help. That was true when the Nixon administration instituted nationwide wage and price controls in the 1970s, and it’s true today in the case of price controls on insurance. Indeed, I think it’s time to say publicly what so many of us know: that government price controls on insurance have been an absolute failure. Here’s a partial list of the havoc price controls have wreaked:
Distortion of the insurance marketplace;
Politicization of insurance pricing;
Limitations on consumer choice, and reductions in competition.
Let me elaborate on each of these points.
First, price controls have distorted the marketplace. The rating laws that authorize government price controls in nearly every state share a common theme. They all say that no insurance rate will be permitted which is "inadequate, excessive, or [is] unfairly discriminatory." And they all give the insurance regulator the authority to enforce this prohibition. Now, if you survey different states, you’ll notice that the states that are particularly aggressive in exercising their price control authority invariably succeed in driving insurers away, while achieving no long-term reductions in price. That’s true whether we’re talking about price controls on auto insurance, or measures taken by regulators in the aftermath of windstorms and earthquakes to suppress rates for homeowners insurance. Instead of making insurance more affordable and more available, price controls have had the opposite effect. By contrast, our host state of Illinois — which has few, if any, price controls — has perhaps the most competitive, consumer-friendly insurance market in the country.
What accounts for this urge to subject insurance pricing to government control rather than the workings of the free market? Well, it seems that some people are disturbed by what they regard as a moral coldness — a lack of compassion — in the market. In their view, charging higher insurance premiums to people who are considered especially risky through no fault of their own smacks of "blaming the victim." They believe that the less fortunate should be helped, but instead the insurance market seems to punish the less fortunate. But it’s a mistake to think that the remedy lies in socializing insurance through regulation.
When government sets prices, invariably several unintended negative consequences ensue. There will be fewer competitors vying for customers in the marketplace. Fewer options will be available to higher-risk individuals who are seeking insurance. And because the price people pay for insurance no longer corresponds to the risk associated with their actions or behavior, they will no longer have a financial incentive to practice risk mitigation. In other words, price controls encourage people to engage in risky behavior, which of course increases the likelihood that they will suffer a loss of some kind.
Second, price controls have led to the politicization of insurance pricing. When government has the power to control prices, that power will be exercised for political purposes. This won’t happen all of the time. But it will happen often enough to make clear that, however compelling the economic rationale for a particular price, political considerations will probably be decisive in the end. The temptation to control prices, when you have the power to do so, is simply too great to resist. The politicization of insurance pricing is especially likely to occur in situations where the state insurance commissioner intends at some point to seek higher elected office. The only way to eliminate the temptation to allow political ambition to influence the power to control insurance pricing is to eliminate the power.
Third, price controls artificially limit consumer choice, thereby reducing competition. It’s axiomatic that when government controls prices, product options dry up. This is so obvious a proposition that I am always amazed we don’t do better in debates with those who argue that government price control is the pro-consumer position. Insurance price controls notwithstanding, the trend in the rest of the economy is toward the deregulation of prices. Over the last 25 years, price controls have been eliminated or drastically curtailed in almost every sector of the U.S. economy — from transportation to banking to agriculture. Even the so-called natural monopolies, such as the telephone and electric utilities, are undergoing sharply reduced government price controls and the opening of markets to competition.
Similarly, in the global marketplace, insurance price deregulation is becoming commonplace. There is no government price regulation in the British insurance market. Across the entire European Union, commercial insurers are free to compete for large accounts without government oversight. Even the Japanese government has begun dismantling its system of price controls on insurance.
After all, why should the government control the price of an auto insurance policy, or a homeowners policy, or a workers’ compensation policy, when the government does not control the price of an auto, a home, or a worker’s salary? As long as we accept the notion that government intervention in the relationship between buyers and sellers of insurance is normal and desirable, we can do little more than tinker in the margins of regulatory reform.
My organization, Citizens for a Sound Economy, is waging a campaign to reform our system of insurance regulation. As part of this effort, we have proposed specific changes in insurance regulation in several states over the past year. We have also taken our case to the National Association of Insurance Commissioners, which wields enormous influence over insurance policymaking at the state level. The purpose of CSE’s insurance regulatory reform program is to urge government to allow market forces to determine the price and scope of insurance coverage.
In 1991, a leading insurance scholar, Professor Scott Harrington of the University of South Carolina, concluded his study of insurance price controls with the following observation:
Additional government control over insurance rates is not needed. It would be likely to produce significant inefficiency, including higher claim costs. Instead, rates should be deregulated, and insurance affordability problems should be addressed by measures that reduce claim costs in efficient ways.
Professor Harrington is right to emphasize inflated claim costs as the source of high insurance premiums. State legislatures could help bring claim costs under control by enacting measures such as no-fault automobile insurance laws — and more generally, by embracing tort reform. But those are topics for another day.
Ladies and gentlemen, I’m proud to have played a significant role in the deregulation of the airline, railroad, and trucking industries. In fact, the Brookings book which I coauthored with George Douglas (Economic Regulation of Domestic Air Transport: Theory and Policy, 1974) was held up during the Carter administration as the "bible of deregulation." Just as in the case of insurance, defenders of the status quo said that without price and entry controls terrible consequences would ensue. Planes would fall from the sky. There would be no service for the poor or for those living in out-of-the-way places. Competition would be "chaotic." Prices would go through the roof. None of those dire predictions came true, and now deregulation of transportation saves consumers literally tens of billions of dollars every year.
Let’s do the same for consumers of insurance. Thank you very much for your kind attention.