Something about insurance seems
to make some politicians act crazy. Probably it’s because the two activities –
politics and insurance – are so antithetical. Whether buying or selling, the
essence of insurance is prudence, taking the long view, refusing to be
unrealistic and paying attention to the lessons of the past. Politics as
practiced in the modern welfare state is just the opposite: Ignore history,
focus on the short term and make policy based on the whims of public opinion
rather than reality. Imagine what would happen if an insurance company tried to
run its business that way: It would be bankrupt within months and those with
legitimate claims would never get paid.
Perhaps this explains a package
of bills trumpeted at a Lansing press conference this week that sponsors claimed
– and the press dutifully reported – would "cut insurance rates by 20 percent."
What a great idea! If it’s that easy, how come no one thought of it before?
Of course it’s not that easy and
the legislation would do nothing of the sort. Like all such proposals, the only
thing these bills would do if passed is make insurance unavailable at any price.
They’re nothing more than a re-packaging of bad ideas that have been around for
years. These proposals essentially boil down to prohibiting insurance companies
from charging premium prices that accurately reflect risks and restricting
procedures for limiting payouts on unjustified, frivolous, or fraudulent claims.
Even if not passed, the very fact that such bills are promoted by prominent
members of the political establishment may raise prices by discouraging new
providers from entering the market.
companies base premium prices on risk assessment factors that have proven in the
past to be good indicators of the likely cost of insuring various customer
categories. For example, if you live in Detroit – which has just 9 percent of
this state’s population but more than a quarter of its 50,000 annual car thefts
– you are more likely to file an auto theft claim, so you pay higher premiums.
If you are the kind of person who always pays bills on time and avoids excessive
debt, you’re probably cautious in other areas and may earn an insurance
discount. And if courts limit extra-added "pain and suffering" awards by only
allowing them for auto injuries that inhibit a person’s "general
ability to lead a normal life," then insurance premiums will be lower than if
the less seriously injured can also get such awards. (Note: The latter already
get all their actual medical expenses paid in full.)
package touted this week restricts prudent practices in most of these areas, so
it won’t lower rates. Limiting insurers’ ability to charge higher auto rates in
high-theft areas just raises everyone else’s premiums. Banning discounts based
on credit records means frugal individuals must subsidize high-risk deadbeats.
Requiring courts to use loosey-goosey "disability" definitions means that less
seriously injured people can collect as much as the genuinely disabled, so auto
insurance rates rise for everyone.
What happens if
the state implements these measures, then orders insurance to be sold at a price
that won’t cover the risks? You can probably guess, but let me illustrate with
Imagine a state
prohibited restaurants from charging more for lobster than for hamburger,
mandated that every customer be given unlimited refills at no extra charge and
banned selling any meal that doesn’t include dessert and a nice bottle of wine.
Then, promising diners a 20 percent savings, the state ordered all restaurants
to lower their prices to less than the cost of replacing the food served. A year
later would there be more or fewer restaurants?
ability of insurance companies to control unreasonable claims or price their
products to match the risks makes no more sense than these restaurant
regulations and would produce the same result: There would be fewer providers,
less competition and ultimately higher prices. Politicians who play demagogic
insurance regulation games should pray they don’t get what they ask for.
Jack McHugh is the legislative analyst for the Mackinac
Center for Public Policy, a research and educational institute headquartered in
Midland, Mich. Permission to reprint in whole or in part is hereby granted,
provided that the author and the Center are properly cited.