Auto Insurance: Price Control versus Free Market Competition
May 6, 2008    Georgia Chamber of Commerce   

For Immediate Release
May 6, 2008
Joseph T. Fleming
Senior Vice President
Georgia Chamber of Commerce
mailto:JFLEMING@gachamber.com

Auto Insurance: Price Control versus Free Market Competition

Lower prices, more competition among auto insurers, and more product choices in the marketplace - these will be the benefits consumers will see if Gov. Perdue signs SB 276 into law.

The bill, the culmination of 10 years of debate and discussion, was overwhelmingly passed this year by a bi-partisan, mega-majority of the Georgia General Assembly. Republicans and Democrats, urban and rural legislators, liberals and conservatives, 184 lawmakers cast votes for the bill, House and Senate combined ... just 13 against.

No wonder. The simple notion found in SB 276 is hardly revolutionary: shoppers of car insurance benefit by stimulating more competition among insurers and cutting red tape to speed innovation to market.

Almost half of all states already have moved to such a system, called "file-and-use." One state, Illinois, has completely eliminated regulatory "prior approval" of auto insurance rates. And guess what? Car owners pay less in Illinois than they do in Georgia.

History and common-sense suggest the people of Illinois pay less than we in Georgia because insurers save significantly under a system that requires less bureaucratic paperwork.

The department of insurance requires massive documentation of insurers, whether filing rate reductions or increases - equal in size to a set of New York City phone books. And months and months of preparation, and months and months of bureaucratic review.

Even when insurers want to cut insurance rates, your insurance company must file reams of paperwork and wait months for government approval!

In 2005, when State Farm (the largest writer of personal auto policies in Georgia) cut its rates for the second consecutive year - 5 percent over two years - State Farm's 1.5 million policyholders had to wait months to see the reduction, because even rate cuts have to await bureaucratic "prior approval."

Same for the fourth largest private passenger carrier in the state when they wanted to reduce rates for their policyholders. Or in 1999 when 14 other insurers wanted to reduce their rates. Wait, wait, wait, for regulatory approval ... to cut prices.

Critics of SB 276 would have you believe the sky is falling. Frankly we wish the legislature had gone further, much further, and followed the example of Illinois.

For almost 40 years, the state of Illinois has exercised no role - none, nada, nil - in the pricing of consumer insurance products. A complete competitive, free market. Prior to that, the pricing of insurance was fully regulated by the government.

The result of this sweeping change in Illinois? No, rates did not soar.

Today the average personal auto insurance rate is lower in Illinois than in Georgia.

When Illinois embraced pure competition, the sky did not fall and private passenger automobile insurance has been de-politicized.

Illinois' statewide, individual "average expenditure for auto insurance" is the 26th lowest in the nation, and less than Georgia. The average Georgian pays $779 a year; the average consumer in Illinois pays $760.

In last week's front-page story in The Atlanta Journal-Constitution, "Auto insurance may spike," the newspaper points to New Jersey as one state where an insurance commissioner has absolute power to set insurance prices and noted that New Jersey has seen the lowest increases in insurance rates from 1989-2005.

This is true.

The AJC, however, but fails to mention one small but important fact ... auto insurance rates in New Jersey are the highest in the nation, at $1,184 annually!

Price controls and over-regulation hurt consumers and hit them in the wallet hard. But now, after years of having the highest rates in the country, and the mostly costly, most over-regulated mess of an insurance system, New Jersey has begun giving insurers more flexibility and has moved, incrementally as it may be, to a system of less regulation. And you know what? Rates in New Jersey have finally started dropping.

The AJC, in the same story, reports that Nebraska, under a system with more market competition, had one of the highest increases in personal auto rates in that same time period. But again, the newspaper leaves out an important detail: Nebraska has the 43rd lowest personal auto insurance rates in the country, $637, under the "less government regulation" policies of that state.

To those who might be scared into believing that insurance rates will skyrocket out of control under SB 276; history proves otherwise. But, if still not convinced, note that under SB 276, any rate filing on state-level required minimums of insurance would remain subject to prior approval by the department of insurance.

And any rate implemented by an insurance carrier - reduction or otherwise - could be stopped by the commissioner of insurance at any time. A relatively small step toward less regulation.

Want to pay less for your automobile insurance? Set free the powers of competition, cut the bureaucratic, lengthy and costly regulatory labyrinth insurers must now negotiate. Make SB 276 law.

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