am always intrigued by how much time lawmakers spend on car insurance issues; indeed, over the years, lawmakers have enacted a vast panoply of legislative remedies designed to resolve, in one way or another, affordability problems in private passenger auto insurance. Many of these statutes came into being through thoughtful state legislative leadership to address state specific concerns, while others trace their genesis to work of the National Association of Insurance Commissioners (NAIC). That body, of course, is composed of regulatory officials from the states as well as industry representatives. From the NAIC, a catalogue of Model Laws and Regulations has been approved to set criteria for rating practices, underwriting, market conduct, financial regulatory standards, and methods of examining insurers to assure compliance with their filed rates and forms. State lawmakers are often asked to approve these models, and in the case of auto insurance regulation, most states have done so. That is an important point to remember as legislators address affordability issues.
With that brief perspective, I address three points on the subject, "Auto Insurance Affordability: Legislative Solutions." First, in many instances, lawmakers have already enacted legislation, so the emphasis should be on legislative oversight, not new laws; second, fine tuning of existing regulatory schemes may be helpful; and, third, what you do not want to do is to encourage the federal government to get into the business of auto insurance regulation.
USING LEGISLATIVE OVERSIGHT TO GET THE MOST OUT OF WHAT YOU ALREADY HAVE
Citizens typically complain about what they're paying for car insurance, why they have to pay "too much" for their coverages; and how their claims are handled. Usually, in each case, there is either a regulatory or non-regulatory solution.
What People Pay
Essentially three criteria govern car insurance rate-making and rates (used in this context to mean "what people actually pay for insurance") at the state level: Generally, rates cannot be excessive, inadequate, or unfairly discriminatory. Thus, if the regulator has made no determination that rates are excessive, insurers have a valid defense that the cost is reasonable in relation to the premium charged. From a consumer perspective, the rates may be too high, but that is not equivalent to "excessive."
Of course, the difficulty in this matter is the meaning of "excessive." Under state laws, the regulator, who is an appointed or elected official in the executive branch, has the legislatively delegated authority to make this determination. Accordingly, vigorous oversight of your state's regulatory apparatus may be the first line of defense against excessive insurance costs. Stated differently, if rates are too high, it is because your state regulators permit them to be so.
So, what can legislators do in the way of legislative oversight to prevent car insurance costs from becoming excessive? A thorough company by company review of insurers offering private passenger auto in the state is the first step. This review should cover a period of at least three years and should focus on: (1) premium volume; (2) losses paid; (3) experience by line of coverage, which I will discuss more completely below; (4) insurer overhead expenses; (5) insurer's mix of business, e.g., standard, nonstandard, preferred; (6) insurer's return on investment; (7) what insurers are doing to contain costs, especially in developing programs to identify and prosecute fraud; and (8) the use of underwriting guidelines.
With regard to financial examinations of company experience by line of coverage, a good outline for legislators to follow is the format of a document most people will recognize, the Standard Auto Policy. In outline form, Parts A, B, C, and D of the policy encompass the following:
Part A:
- Liability Coverage
- Bodily Injury Liability
- Property Damage Liability
- Supplementary Payments
Part B:
- Medical Payments Coverage
Part C:
- Uninsured Motorists
- Bodily Injury
- Property Damage (Not in some states)
Part D:
- Physical Damage (Coverage for Damage To Your Auto)
- Collision
- Other than Collision (sometimes referred to as OTC or Comprehensive)
- Transportation Coverage
How do you get information about the experiences of each company writing business in your state in each of these items of coverage? The insurance industry is a data intensive industry with many data sources, most of which should be available through your state regulator. The NAIC publishes annual reports on auto insurance experience and the Insurance Services Office (ISO) is another standard source for the data. Also, keep in mind that insurance companies are required to file Annual Statements with the state Departments of Insurance which detail a considerable amount of useful information. By gaining access to these standard sources, legislative committees can raise the questions that need to be answered regarding affordability issues.
Step two is a briefing on how regulators go about approving or disapproving rate filings. Is the process a perfunctory one? Is it formal or informal? Is there ever a public hearing on a rate filing? What passes as "evidence" during the approval process? Do some companies with a better loss experience (i.e., they are doing comparatively well) get rate increases exceeding increases granted to companies with a worse loss experience? If so, why? Does the Department of Insurance have its own staff of actuaries and financial experts to review the filing, or is this done by contract with outside firms/individuals? If outside personnel are used, what protections are in place to assure that the person who is reviewing a rate filing for the state today is not working for the insurer whose rate filing is under consideration tomorrow?
Step three may be to review what is uncovered in steps one and two. If the regulators are not doing their job, either firm oversight pressure or legislative initiatives may be in order.
Why Some People Pay Too Much
Some drivers end up paying more than they should for car insurance through no fault of their own because they are unaware that all insurance companies are not created equal or because of the underwriting guidelines used by the insurers. What do I mean by the latter statement, "all insurers are not created equal"? Though some companies may not exactly fit the mold, auto insurers can be thought of as falling into three categories: Preferred writers (those which write the best risks); Standard writers (those choosing to insure average risks); and Nonstandard companies (companies writing high risk drivers).
As you may guess, the price for the same types and amounts of insurance among these three types of companies will vary by several hundred percent. The buyer's problem arises because even otherwise sophisticated consumers often do not know the differences among these three types of insurer. Consequently, to accommodate a friend, find someone in the neighborhood who sells insurance or for some other reason, many consumers buy nonstandard coverages although they would qualify for standard rates. And sometimes a young person will be placed in a nonstandard company at age 19 or 20 and remain there out of habit after the age of 25. In economic terms, they are paying more than they otherwise should for auto insurance for the same reason some people pay more than others for the same vehicle when they buy a new car: imperfect information. Compounding this problem is the fact that there is no requirement that an agent representing several companies (an "Independent Agent") place a consumer with the company charging the lowest premium.
A common scenario is that a consumer's costs may be higher than anticipated because of insurer underwriting guidelines. What are these guidelines and how do they operate? Georgia defines underwriting guidelines to mean, "The written, oral or electronic statements, guidelines, or criteria of an insurer which describe the standards used by an insurer to issue a policy, decline to issue a policy, non-renew a policy, discontinue or cancel a policy, or restrict coverages provided by a policy of automobile insurance." Common underwriting guidelines include how long you've lived at your current address, occupation, whether you own your home or rent, educational level, armed services membership, previous insurance from a nonstandard carrier, lack of previous insurance, number of vehicles to be insured, marital status, and credit report score.
To place the role of underwriting guidelines in perspective, it may be helpful to think of buying car insurance as a two step process: First, you have to pass the company's dress code (their underwriting guidelines) and, second, the company has to decide how to price your coverage. In many instances, people are either rejected or are placed in a nonstandard insurance company because of underwriting guidelines (the dress code) not because of any rating factor used in their rate filing for determining how much the company will charge for insurance, e.g., territory, type of vehicle, driving record, age, gender.
One of the most common dress code factors is the credit report score. It is also one of the more controversial aspects of underwriting because many regulators are unconvinced that a person's credit report score bears any independent relationship to a likelihood of being involved in an accident, let alone the likelihood of causing it.
Further, a cursory examination of insurer underwriting guidelines may leave the impression that many other factors relied upon bear no relationship whatsoever to the risk the insurer is assuming; accordingly, some states, Texas and Georgia, for example, ban underwriting guidelines that are not risk related.
The issue of underwriting guidelines may have special relevance in those states with mandatory insurance laws. From a consumer standpoint, in mandatory insurance states, the government is mandating a market for insurers and permitting them to exploit consumers at will by basing access to and price of insurance on arbitrary measures.
Does the problem require legislative remedies? Perhaps, but it is also possible that regulators have rule making authority to address the problem. For example, in Georgia, a regulation combining the prohibitions of fictitious groups and the unfairly discriminatory standard in rating practices were used to prohibit several underwriting guidelines, including the ones mentioned above.
LEGISLATIVE FINE TUNING
To summarize, by skillful oversight of regulators and by insistence upon enforcement of existing laws, legislative bodies can have a significant impact upon auto insurance rates. Nevertheless, in addition to determining whether rule making or legislating is the solution to the credit report problem in your state, a few legislative changes may be helpful.
1. Rollback authority. If state law does not empower a regulator to order rollbacks upon a finding that rates are excessive, change the law to allow rollbacks. In Georgia, for example, courts have ruled that an insurer whose rates are deemed to be excessive may retain premiums collected before the determination was made, but not afterwards. This is a "you get one bite out of the apple" without penalty principle which works to the advantage of the insurer, not the policyholder.
2. Legislatively mandate that underwriting guides must bear a relationship to risk. The effect of this change will be that the playing field for private passenger auto insurance will experience a dramatic shift. By eliminating criteria that bear no relationship to risk, insurers will be forced to do what they are actually licensed to do: insure against risk, not punish people because of their life style preferences.
3. Enact legislation permitting the group purchase of private passenger auto insurance. Currently, Massachusetts allows group purchasing and there is a Model NAIC bill that each state may consider for adoption.
4. Over 20 years ago, a Report of the United States Department of Justice Task Group on Antitrust Immunities concluded that "Fixed commission rates have contributed to a regressive rate structure in automobile insurance and produced unfairly discriminatory rates." Fixed commission rates exist for a reason, i.e., laws punish insurance agents for competing on commissions. The effect of these laws is to preserve for the car insurance industry the last vestige of retail price maintenance practices. This anti-competitive practice is especially harsh on consumers in mandatory insurance states. So the message is clear: Repeal the Anti-Rebate laws to encourage competition.
5. Encourage insurers to use sliding scale commission structures, i.e., different commission levels for renewals, and different commission levels for different companies when a company operates through several distinct corporate entities within a state. This is sometimes referred to as tier rating and may have a favorable economic impact for consumers.
6. Just as I would suggest that lawmakers require insurers to rely exclusively upon risk related factors in pricing insurance, I recommend that the same standard apply to lawmakers, too. For example, there is a temptation to insist that students who maintain good grades get a discount on auto insurance. Improving academic performance is a worthy goal, but unless someone can demonstrate a statistically significant difference between academic performance and claims experience, I urge caution in using the insurance mechanism to achieve objectives for which it is ill-suited.
7. Reduction of insurer overhead costs is an important consideration in containing auto insurance rates. To illustrate, when I assumed office as Commissioner in Georgia, I was surprised to learn that some of our auto insurers were reporting overhead costs approaching 50 percent. Recognizing that this is an intolerable number for most businesses, I concentrated upon finding new ways of reducing overhead. Initially, we suggested that insurers set a target of 30 percent but 20 to 25 percent is not unrealistic for some companies. (Auto insurer filings generally assume that 65 percent of premium income will be paid out in claims).
8. State governments use different approaches to rate approval: File and use, use and file, and prior approval are the standard methods. Which works best is a state by state determination, but I personally prefer the prior approval method under which no private passenger rate increase can go into effect unless it has the formal approval of the regulator. Properly implemented, this approach requires both regulator and insurer to do their homework when decisions about rate filings are made.
9. More efficient marketing, including removal of any obstacles to internet marketing of auto insurance products, is a developing matter of concern and may offer some savings to consumers.
10. Since medical aspects of auto insurance are really a form of medical protection that just happens to be a part of an auto insurance contract, perhaps the time has come for health insurers to offer riders or specialized coverages for persons injured in auto related incidents. This may be an issue that will appear on state legislative agendas without warning in the near future because ERISA health benefit plans are increasingly excluding coverages for medical costs attributable to car accidents. (This is not good news for federal choice no-fault proponents whose federal choice no-fault idea will require that health insurers assume primary responsibility for paying medical claims in auto accidents).
FEDERAL INITIATIVES IN PRIVATE PASSENGER AUTO
S.625, The Auto Choice No-Fault legislation spearheaded by Senator Mitch McConnell (R-KY) and Rep. Dick Armey (R-TX) is the latest legislative attempt to focus upon auto insurance. Will it reduce auto insurance costs? Every time I hear an affirmative answer to that question, I am reminded of the lyrics to country music star George Strait's, "Ocean Front Property."
"I've got some ocean front property in Arizona,
"From my front porch you can see the sea.
"I got some ocean front property in Arizona,
"If you'll buy that I'll throw the Golden Gate in free."
Sponsors of federal no-fault sugar coat their proposal with the claim that it will cut car insurance costs so much it will be "the equivalent of a tax cut." However, the bill's only cost reducing factor is the provision requiring that a driver's health insurer be primary in paying medical bills attributable to auto accidents. In other words, the only way the bill lowers costs is through a plan conventionally known as "Robbing Peter to pay Paul."
A state-by-state examination of average premium costs for car insurance further demonstrates that average premium costs in no-fault states consistently exceed comparable costs in states retaining traditional tort based systems. Indeed, two states with the highest costs, New York and New Jersey, are no-fault states. Recognizing that no-fault systems are too costly, Georgia (while I was Commissioner of Insurance) and Connecticut repealed their no-fault statutes enabling motorists in both states to lower their auto insurance costs.
Conclusion: Repealing no-fault, not enacting it, is a better bet for reducing auto insurance rates.
Federal choice no-fault is a radical departure from established public policy that insurance regulation is best left to the states. By federal mandate, no-fault coverages would be offered to every driver in the nation, even in the majority of states where voters have determined that no-fault is unwelcome. States by specific legislation may opt out of the plan, but why should state legislatures have the no-fault issue forced upon them by Congress in the first place?
Without any funding to pay for it, the legislation mandates that each state's Commissioner of Insurance maintain a program for "adequately" informing consumers about comparative costs of insurance under no-fault and alternative systems. Commissioners must also "adequately" inform consumers about "the benefits, rights, and obligations of insurers and insureds under each system" in their respective states. "Adequately" is undefined.
Other aspects of the legislation could have a dramatic, negative impact upon state laws that provide discounts for good drivers, hold agents and insurers responsible for explaining coverages truthfully, prohibit arbitration clauses in personal insurance policies, and establish certain standards of conduct for the way insurers must treat their insureds.
A National Association of Insurance Commissioners' analysis of the legislation, approved by a NAIC Committee June 23, candidly stated the challenge for state governments: "Under S625, the issue for states is whether the bill would materially and detrimentally impinge on a state's right to choose what type of auto insurance system it will impose upon its citizens?" The Committee further identified an itemized list of 10 concerns the federal legislation poses for state regulators --- concerns that go to the very heart of a state's ability to make its own choices about how auto insurance should be regulated.
Conclusion: Federal choice no-fault will undermine state regulation.
At a time when states are cracking down on drunk and reckless driving, it is ironical that members of Congress embrace legislation counteracting what states are doing to encourage safer driving habits. That no-fault systems encourage negligent behavior is argued by William L. Landes and Richard A. Posner in The Economic Structure of Tort Law (1987). According to Landes and Posner, traditional tort systems, which assess fault, provide incentives for personal responsibility, thereby reducing the number of fatal accidents. Further, a summary of studies reported in the UCLA Law Review in 1994 concludes that both auto fatalities and incidences of drunk driving increase in no-fault states, principally because bad, negligent drivers are no longer responsible for or made to pay for reckless behavior on the roads.
Conclusion: No-fault discourages a sense of personal responsibility on the roads and forces good drivers to pay for bad drivers. That's not a good choice.
Advocates of federal regulation of car insurance also argue that no-fault is tort reform, a means of ending big pain and suffering awards when careless drivers maim and kill on our highways. Perhaps I have missed something in my years as a regulator and litigation support expert: What big pain and suffering awards in private passenger auto? Defective vehicles and tires, yes. But just plain, old car insurance claims? Such big awards are rare -- so rare that I have never known of an insurer's attempt to justify a rate increase with evidence of pain and suffering losses. My hunch is that if insurers were required to isolate such claims, the losses paid for "big pain and suffering awards" would be miniscule.
Auto insurers do get sued, most often because they foul up by writing ambiguous policy language, improperly denying coverage, or handling a claim improperly. But with the exceptions of bad faith judgments, insurers' liabilities are limited by the policy limits that are part of their filing record with regulators. If the policy limit is $100,000, that's all the insurer pays.
To put it bluntly, I have never witnessed a private passenger auto insurer attempt to justify a rate filing on the basis of excessive judgments against the insurer.
Conclusion: Choice proponents are misleading people by promoting a "cure" for the wrong ailment. Auto insurance claims are very different from product liability litigation.
Finally, perhaps the time is out of joint for choice advocates. Because of regulatory pressures, an aging population, safer cars, better returns on insurer investment of premium dollars, and other factors, insurers everywhere are reducing auto insurance rates. Consequently, experience demonstrates that the old way of doing things, state by state, is alive and working well. That is as it should be.
