Given the evidence on competition and profitability, auto insurance rates cannot be rolled back if insurers are to be allowed a fair rate of return. Political pressure may cause some rollback in California, but it is likely to be much less than 20 percent of premiums. It also is likely that the principal function of proposals for mandatory premium rollbacks without any reduction in claim costs is to generate public support for increased regulation. The major consequences of adopting Proposition 103-type regulation in Michigan would include (1) an increase in subsidies that would be likely to increase accident costs, (2) a large increase in the size of the MAIPF and pressure for the creation of a reinsurance facility or some other form of mandated marketing, (3) costly rate hearings involving numerous expert witnesses and attorneys for consumer advocates, regulators, insurers, and agents, (4) strict regulation and control of insurer operating expenses, and (5) less consumer choice due to reduced variation in insurer marketing methods and services.

The causes of high premiums and auto insurance affordability problems are high claim costs and requirements to buy extensive coverage. Increased regulation of insurance rates, rate classification, and operating costs are not justified by imperfections in the insurance market. [99] Advocates of substantially greater regulation either misunderstand the causes of affordability problems or are so dissatisfied with the outcomes of competitive, cost-based pricing that they favor strong government control of the market or even direct public provision of coverage to reduce differences in premium rates across consumers.

Table 7

1988 Operating Results for Private Passenger Auto Insurance as a Percent of Earned Premiums: Michigan and Countrywide

 

Liability

Physical Damage

Item

Michigan

U.S.

Michigan

U.S.

l. Incurred Losses

83.7%

79.4$

65.3%

61.0$

2. Loss Adjustment Expenses

13.7%

13.1%

8.4%

7.9%

3. Total Loss and Adjustment

    [(1) + (2)]

97.4%

92.5%

73.7%

68.9%

4. Selling Expenses

15.6%

15.5%

16.0%

16.1%

5. General Expenses

4.0%

4.2%

3.8%

4.0%

6. Taxes, Licenses and Fees

3.0%

2.9%

2.8%

2.8%

7. Total Underwriting Expenses

    [(4)+(5)+(6)]

22.6%

22.6%

22.6%

22.9%

8. Investment Gain

9.6%

9.6%

2.2%

2.3%

9. Dividends to Policyholders

1.0%

0.9%

1.0%

0.9%

10. Federal Taxes

-4.4%

-2.9%

1.3%

3.0%

11. After-tax Operating Profit

    [(100-(3)-(7)+(8)-(9)-(10)]

-7.1%

-3.5%

3.5%

6.6%

Note: Liability includes bodily injury and property damage liability, personal injury protection, and uninsured motorists coverage. Physical damage includes collision and comprehensive coverage. Underwriting expenses calculated according to generally accepted accounting principles.

Source: NAIC Report on Profitability By Line and By State 1988


The preferred alternative to more regulation as a means of mitigating affordability problems is to allow competition to operate, to reduce the amount of mandatory coverage, and to institute appropriate policies to control claim costs for liability, personal injury protection, and physical damage coverage. In addition to its economic benefits, this approach is consistent with the traditions of limited government and free enterprise. Insurers must explain the advantages of this approach to the public compared to greater regulation. They also must be willing to bargain for changes that will benefit policyholders by accepting temporary mandatory rate cuts that are tied to changes that reduce claim costs. Unless insurers elicit increased support from the public and strongly oppose increased regulation of underwriting and rate classification, the private sector is likely to play a much smaller role in the provision of auto insurance and other types of coverage in the years ahead.