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.
