Comments to National Association of Insurance Commissioners

Emptying the insurance policy shelves: Why price controls are a bad idea even in insurance markets.

Dear Chairman Parsons and Members of the Property and Casualty Insurance (C) Committee:

I write to you on the behalf of the Competitive Enterprise Institute, a Washington, D.C.-based think tank devoted to classical liberal economic policies. We advocate these policies because we believe in freedom for both individuals and business enterprises. Our only permanent interest is the Free Market itself.

We commend the C Committee’s willingness to revisit a regulatory framework that many people believed had serious flaws. The current report represents significant hard work on the part of the committee and brings much important economic research to bear on vital questions confronting America’s insurance industry and its consumers.

We do, however, wish to raise some serious concerns about the framework proposed and suggest that the Committee again revisit it and replace it with a model entirely free of state-imposed rates. We wish to make three major points

• The Committee’s Discussion of “Competitive Economics and the Economics of Regulation” Ignores Literature on Both Government Failure and the Problems of Price Controls.
• The Committee Still Envisions Continued Price Controls Despite Denying that it Does so.
• The Committee Wrongly Believes that Insurance is Not Subject to the Same Rules of Supply and Demand as Other Goods.

A discussion of our points follows:

The Committee’s Discussion of “Competitive Economics and the Economics of Regulation” Ignores Literature on Both Government Failure and the Problems of Price Controls.

While paying lip-service to the idea of a free market for insurance and providing an adequate review of the economic literature concerning insurance pricing, the Committee focuses unnecessarily on the possibilities of “market failure” and neglects the potential for “government failure” while failing to perform an adequate survey of the literature concerning the failure of price controls. Essentially, Committee C postulates that only government—as opposed to natural market mechanisms—can correct inevitable market failures.

As best as we can discern, however, the reasoning that supports this conclusion is circular. To back its case, the Committee’s approvingly cites a scholar who finds that private market discipline cannot work to regulate because the existence of state regulation precludes the market’s natural disciplinary function: the failure of inefficient firms. This reasoning, frankly, is bizarre: essentially, the Committee is arguing that the existence of state regulation makes state regulation necessary. It does not even consider the possibility of eliminating government-imposed rate regulation. It should do so.

Just as importantly the Committee makes no effort to look at the extensive literature concerning the problems resulting from both direct and indirect price controls. For example, the Committee may wish to acquaint itself with the Department of the Treasury’s recent Blueprint For a Modernized Financial Regulatory Structure which provides an ample argument as to why almost all rate regulation fails to serve the public interest; so does a wealth of other academic research. Committee C would benefit from weighing down clearly on one side or another of the question of rate regulation. If it wishes to continue its defense of the current price control system, it should provide a reply to the research—and working examples in Illinois, Vermont and elsewhere—that shows the consumer and market benefits of systems with minimal or no rate regulation. In addition, any regulatory framework should weigh the possibilities of market failure against the possibilities of government failure: regulation cannot and should not justify itself.