Insurance Demagoguery Drives Rates Higher, Not Lower

Something about insurance seems to make some politicians act crazy. Probably it’s because the two activities – politics and insurance – are so antithetical. Whether buying or selling, the essence of insurance is prudence, taking the long view, refusing to be unrealistic and paying attention to the lessons of the past. Politics as practiced in the modern welfare state is just the opposite: Ignore history, focus on the short term and make policy based on the whims of public opinion rather than reality. Imagine what would happen if an insurance company tried to run its business that way: It would be bankrupt within months and those with legitimate claims would never get paid.

Perhaps this explains a package of bills trumpeted recently at a Lansing press conference that sponsors claimed – and the press dutifully reported – would "cut insurance rates by 20 percent." What a great idea! If it’s that easy, how come no one thought of it before?

Of course it’s not that easy and the legislation would do nothing of the sort. Like all such proposals, the only thing these bills would do is make insurance unavailable at any price. They’re just a re-packaging of bad ideas that have been around for years, and essentially boil down to prohibiting insurance companies from charging premium prices that accurately reflect risks and restricting procedures for limiting payouts on unjustified, frivolous, or fraudulent claims. Even if not passed, the mere fact that such bills are promoted by prominent members of the political establishment may raise prices by discouraging new providers from entering the market.

Insurance companies base their premiums on risk assessment factors that have proven in the past to be good indicators of the likely cost of insuring various customer categories. For example, if you live in Detroit – which has just 9 percent of the state’s population but more than a quarter of its 50,000 annual car thefts – you are more likely to file an auto theft claim, so you pay higher premiums. If you are the kind of person who always pays bills on time and avoids excessive debt, you’re probably cautious in other areas and may earn an insurance discount. And if courts limit extra-added "pain and suffering" lawsuit awards by only allowing them for auto injuries that inhibit a person’s "general ability to lead a normal life," then insurance premiums will be lower than if the less seriously injured can also get such awards. (This "pain and suffering" restriction is part of Michigan’s no-fault auto insurance system, which already paysall the actual medical expenses of an injured motorist without having to file any lawsuit).

The legislative package touted at that press conference restricts prudent practices in most of these areas, so it won’t lower rates. Limiting insurers’ ability to charge higher auto rates in high-theft areas just raises everyone else’s premiums. Banning discounts based on credit records means frugal individuals must subsidize high-risk deadbeats. Requiring courts to use loosey-goosey "disability" definitions means that less seriously injured people can collect as much as the genuinely disabled, so auto insurance rates rise for everyone.

What happens if the state implements these measures and then orders insurance to be sold at a price that won’t cover the risks? You can probably guess, but let me illustrate with an analogy:

Imagine a state that prohibited restaurants from charging more for lobster than for hamburger, mandated that every customer be given unlimited refills at no extra charge and banned selling any meal that doesn’t include dessert and a nice bottle of wine. Then, promising diners a 20 percent savings, the state ordered all restaurants to lower their prices to less than the cost of replacing the food served. A year later would there be more or fewer restaurants?

Limiting the ability of insurance companies to control unreasonable claims or price their products to match the risks makes no more sense than these restaurant regulations and would produce the same result: There would be fewer providers, less competition and ultimately higher prices. Politicians who play demagogic insurance regulation games should pray they don’t get what they ask for.

Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.