Letter From Washington: When, And How, Is It Good To Regulate Insurance?

by Eli Lehrer on February 8, 2011

photo by wallyg/Flickr, used under a Creative Commons license

I’m hearing more and more about the possibility of reforming North Carolina’s unusual automobile insurance system. The system, which I write about here, was once pretty close to the norm in the country but, today, is a curiosity.

In North Carolina, but nowhere else in the country, all automobile insurance rates are based on an industry-designed, government approved “bureau plan” that specifies how every company prices its products.  To make things more complicated, about a quarter of drivers have their insurance underwritten through a privately run, state-mandated “reinsurance facility” that covers bad drivers while private companies service their policies. (Companies have the right to cede policies to the facility, no questions asked.)

Although some companies do dislike it, most are actually pretty happy with the system. And why shouldn’t they be? With “free ceding” any company that has any doubts about its ability to make money off of writing a policy can simply turn it over to the facility and still keep its staff employed servicing the policy. (Laws do limit real economic profits from facility policies.) As a result, its virtually impossible to lose money writing auto insurance in North Carolina and new companies are happy to do business there.

But consumers don’t end up that well off under the system in at least three ways. First, the facility perpetually loses money and, thus, all drivers in the state are taxed to pay for these losses. Second, while auto insurance rates are lower than the national average, this appears to be mostly a function of the fact that North Carolina’s household income is also lower than the national average and its drivers are pretty good. Adjusting for these things, it looks like North Carolina drivers actually pay higher-than-average rates. Finally, although the Department of Insurance is, by reputation, one of the most efficient in the country – rate filings can come back the next day so long as they’re letter-perfect – the sheer weight of the bureau system has made it unattractive for companies to introduce new products in North Carolina. If you want pay-per-mile auto insurance, biannual rebate checks for good drivers, and price comparisons from other companies, you mostly won’t find those in North Carolina.

A simple “end it tomorrow” system would probably be needlessly disruptive but the system, while good for business, mis-serves the states consumers, particularly those who drive well.  It ought to change.


I’m going to be speaking today (Tuesday) at an event put on by Heartland’s friends at the American Consumer Institute. My topic: when is it good to regulate insurance and when is it bad?

I have two apparently contradictory thoughts. First, insurance is intrinsically a regulated product that couldn’t exist as we know it absent regulation. Second, in important ways it is overregulated. Let me explain the points in order.

Admitted market insurance – the type of insurance that almost all individuals buy for personal needs – is a regulated product by definition. Without solvency regulation, form regulation (necessary to facilitate utmost good faith sales), and guarantee funds, the product would be intrinsically different from what consumer are used to buying. Even if one thinks that a system without these things would be better, it’s hugely different from what we have now, doesn’t exist anywhere in the developed world, and would involve marketing a product for which there’s no proven market demand.  There’s plenty of excess and surplus lines insurance around that involves only a minimum of solvency regulation and none of the other regulation.

The problem is that this type of necessary – basically benign – regulation also comes along with price controls. Even if one accepts social utility of somehow subsidizing the ability of some people to afford insurance (and, yes, in some cases, lower rates are better) its not at all clear why price controls impacting the entire market are a good way to accomplish that. In fact, I can’t think of a reason why.

My bottom line: insurance regulation in general is necessary. Insurance rate regulation is dumb.


CPAC, the big annual conservative conference, takes place this week. Heartland will have a booth in the exhibit hall and several of my co-workers – Joe Bast and Jim Lakely most prominently – will be on the program. I’ll be at the Heartland booth for part of Thursday. If you’ll be at CPAC, do stop by to say ‘hi.’

Until next week,

Eli Lehrer, Vice President, Washington, D.C. Operations

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