Letter from Washington: Chicago as America’s true insurance capital

by Eli Lehrer on November 29, 2011

Spending Thanksgiving with my parents in Chicago last week, I continued to be amazed by the emergence of Chicago as the nation’s true insurance capital. Four of the five tallest buildings in the downtown—Willis Tower, Aon Center, Two Prudential Plaza and  the John Hancock Center—bear the names of insurance companies.

There’s a strong libertarian tendency to place the credit for Illinois’s  emergence on its no-file-for-personal-lines system. Certainly, all other things being equal, this has some merit. No-file lets companies make more money near home and also attracted other insurers (international ones) to Chicago and the State of Illinois. But it’s not really a very satisfying answer for several reasons.

Except for Willis, the large insurers existed and were big U.S. market players before no-file existed in Illinois. While big personal lines carriers (Allstate Corp. and State Farm) that benefit from no-file are headquartered in Illinois, most of the companies involved don’t really worry about filing rates. Only one of the tall Chicago buildings is named after a company (Prudential Financial) that has done any rate-regulated personal lines P&C business at all, and Prudential exited that market years ago.

So if it isn’t no-file, why is Illinois an insurance capital? A few reasons come to mind.

First, Chicago and Illinois in general are roughly the population center of the country: about half of the population is on either side of the state. Particularly before widespread jet travel, and even with it, this gave multi-state companies a huge advantage in deploying networks of agents. Unlike an East Coast or West Coast company, the agents of an Illinois insurer could all be roughly equidistant from the home office. In fact, only three of the ten biggest P&C carriers (Liberty Mutual, American International Group, and Travelers Cos.) are located on the coast. Although Travelers keeps its executive office in New York and its single largest office in Hartford, Conn., it is actually incorporated in St. Paul, Minn., reflecting its pre-merger history as The St. Paul Cos. And AIG simply isn’t a big personal lines P&C carrier any longer.

Second, particularly in the pre-computer age, Illinois’ reasonably low living costs made it more attractive for the labor-intensive business of processing claims and answering calls. Today, most insurance claims are handled regionally or even locally, and a lot of the paper-pushing jobs have migrated to places with lower labor costs than Chicago. But the headquarters offices still remain in the Second City.

Finally, insurance—particularly P&C insurance–doesn’t need fancy investing or Wall Street to the same extent as other financial services industries. The synergies of being near the New York Stock Exchange aren’t nearly the same as they would be for other financial industries.


Media bias doesn’t always, or even usually, relate to politicians as such. Actually, I tend to think that there’s a strong tendency in the media to give politicians in high places a hard time regardless of party. (It makes for good copy.) The New York Times—not the Wall Street Journal editorial page—won Pulitzer Prizes for investigating the Clinton administration. But economic reporting often shows a clear left-wing bias. Here’s a shining example: a Times story that reads like copy for the Occupy movement:

Saks Fifth Avenue (the 1%’s favorite store), the Times reports, is doing great while Wal-Mart, which caters to the 99% is seeing a downturn.  One problem: the actual performance of the two companies tells a very different story. Wal-Mart has held back on price increases and thus saw a 2.9% percent decrease in profits from last year. For the Times story to hold water, one would expect Saks’ profits to have increased while Wal-Mart’s fell. They didn’t. Saks, in part because of tax-related gains it saw last year, has seen profits drop 51% percent. In a tough economy, Wal-Mart is actually weathering the storm a lot better than Saks.

The bottom line is that while the United States does, indeed, have large wealth disparities, comparing Saks and Wal-Mart—something even the more conservative New York Post did—doesn’t tell one anything about those disparities.


Here’s a thought on wealth disparities. If one wanted, above all else, to reduce observed wealth disparities and decrease the pay of CEOs, then there is one very simple policy that would do it: Cutting or even eliminating the corporate income tax. (For the record, I think that wealth disparities are worth addressing via public policy but reducing them, per se, should not be a major goal. I also think that mediocre/bad corporate CEOs are grossly overpaid whereas really effective ones deserve even fatter paychecks than they get.)

Since the current tax code makes often makes corporate tax rates higher than those on capital gains and personal income, it’s very advantageous, all other things being equal, to pay individuals at the top relatively more and offer more dividends or buybacks to stockholders. Since taxes are always going to be passed on somewhere, as former Clinton administration Secretary of Labor Robert Reich has observed, it’s often easiest to reduce workers’ wages rather than cutting stockholder returns or raising prices on consumers. Stockholders can send capital elsewhere and consumers can buy from someone else.

Even in a very good economy, however, finding a new job takes significant time and effort.  Thus, I think that there’s a good argument that eliminating corporate income taxes, in the long-term, would have a good effect on wages at the bottom of the economic ladder.

Even if one doesn’t believe that cutting or eliminating the corporate income tax would directly improve wages, however, it would certainly provide an incentive for people—particularly entrepreneurs who own very significant percentages of their companies—to keep more cash in their companies rather than paying it out. This might or might not have any real consequence for relative living standards.: It’s possible that CEOs might have the corporations provide them with more on-the-job perquisites or just leave capital essentially dormant in their companies. But it still would reduce observed wealth disparities, since lower taxes on corporations would almost certainly pass out less cash in the form of executive salaries and dividends and this would directly impact incomes.

Whatever their merits, other measures favored by the Left like raising taxes on the well-off and increasing transfer payments would not have any observed effect at all on measured income disparities, since taxes are never taken into account in determining incomes and transfer payments only rarely are.

Raising personal income taxes on the wealthy so that they were higher than corporate income taxes, on the other hand, would do some of the same things but, on balance, wouldn’t make as much of a difference since, it’s much more likely that the rich (particularly the very rich) would just figure out ways to avoid the taxes. (They always do.)

I don’t think that reducing wealth disparities is actually a very compelling reason to reduce the corporate income tax. But if one’s goal is smaller wealth disparities, then a lower corporate income tax is, indeed, a way to get there.

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