V. Regulation and Competition

Advocates for increased regulation of the auto insurance market in Michigan and other states argue that the insurance market is not competitive. It is alleged that insurers fix prices, that they make excessive profits, and that the market is characterized by waste and inefficiency. [76]

In November 1988 just over half of California voters voted for Proposition 103. Among other provisions, Proposition 103 requires prior approval of auto insurance rates under certain conditions and requires that rates primarily be based on the insured's driving record, annual mileage, and years of driving experience. The latter requirement is likely to result in restrictions on the use of gender and territory as rating factors. A provision that played a major role in generating support for the proposition was the requirement that rates be rolled back 20 percent below levels that existed in November 1987 unless to do so would threaten an insurer with insolvency. In June 1989 the California Supreme Court held the insolvency exemption unconstitutional and stipulated that rates could not be reduced below levels needed to provide insurers with a fair rate of return on capital. The Court let stand most of Proposition 103's other provisions. [77]

An auto insurance bill has been introduced in the Michigan legislature that contains many of the provisions included in Proposition 103. [78] The bill would require close supervision of auto insurance rate levels, profits, and insurer operating expenses, eliminate territorial rating, and mandate a 20 percent rate rollback from rate levels in effect on May l, 1988. The bill also would eliminate the ability of insurers to pool data for the purpose of developing estimates of future loss costs. [79]

This final section of the study deals with the question of whether conditions in the auto insurance market justify increased regulation of rates, rate classes, and operating expenses. The principal conclusion is that in the absence of government regulation that impedes price competition, evidence indicates that the market for auto insurance and most other lines of property-liability insurance is competitive in Michigan and other states. Adoption of Proposition 103 type regulation is not necessary to protect consumers, and it would have several. harmful effects.