How is it that Illinois, a state that has not shared a strong commitment to free market principles, became the first state in the country to allow insurance rates to be driven by open competition and is a risk factor.
In 1970, continuing the practice of many states in the 1960s, the Illinois General Assembly replaced the state’s “prior consent” to establish personal injury compensation – which had been established in 1947 after the US Supreme Court’s decision in United States v. South-Eastern Underwriterswhich found that insurers make middle-of-the-road sales with a “file-and-use” system.
Under the new system, insurers can start using rates that they have written with the regulator even before they receive approval or disapproval. What happened was that the companies agreed to adhere to the ratings set by the rating agency – exactly the kind of agreement that takes place in South-Eastern Underwriters— was completely banned.
The following year, in August 1971, the law was set to expire and the legislature neglected to extend it. The result, whether intentional or not, was that Illinois became the only state in the country without an insurance law at all. And it stayed that way (with a few exceptions) for 52 years.
Until now.
Under HB 2203, to be heard today before the insurance committee of the Illinois House, any insurer that wants to provide private car insurance in the state must register a full claim with the insurance department, which will also be empowered to approve or deny rates on an approved basis. The bill would also prohibit insurers from setting rates based on any “non-driving” factors, including credit history, employment, education, and gender.
The measure also creates a new system of public intervention in pricing, stating that “any person can initiate or intervene in any activity authorized or established according to the provisions and oppose the actions of the Director.”
In short, this law would transform Illinois from the most open and competitive insurance market in the country to one that is strictly regulated under the most restrictive laws: the unregulated and state-led system created by California’s Proposition 103.
The question, of course, is why the government would do this? It’s true that insurance rates are going up in Illinois, but they’re also going up everywhere else. Insurify estimates that the average cost of auto insurance will increase by 9% to $1,777 in 2022 and the firm projects that prices will rise another 7% to $1,895 this year. In fact, auto insurance rates in Illinois remain 15.5% lower than the national average.
Inflation and continued supply problems are a big part of the story there. The increase in traffic congestion also appears to be another reason. According to the National Highway Traffic Safety Administration, US traffic deaths will reach a 16-year high in 2021, with 43,000 deaths.
But this is all about the original loss and claim data. Maybe the transport manager can do something to reduce the traffic accidents. The Federal Reserve tries to stop inflation. But the insurance adjuster can’t do anything. Since no insurance company could remain in the premium business long enough that it was unprofitable, the only way to lower insurance rates is if the market is not competitive, which allows some underwriters to use their premium power to make more profits.
The evidence that these assumptions explain Illinois is very thin. There are 230 auto insurance companies in Illinois. Based on the Herfindahl-Hirschman Index (HHI), which the US Department of Justice (DOJ) and the Federal Trade Commission use to assess the number of people at risk in a given market, the auto insurance market in Illinois scored 1,224 in 2021. The last year the NAIC data is available. This dwarfs even the FTC and DOJ’s (1,500) “highly regulated” market. Car insurance in Illinois is competitive.
Also, the government’s main car insurance exactly swimming profit. Allstate has posted revenue of $2.91 billion in 2022, driven by the impact of the private car market. For GEICO, a subsidiary of Berkshire Hathaway, it was a full-year pre-tax loss of $1.88 billion. Bloomington-based State Farm, the largest auto insurance company in Illinois and the United States, lost 13.2 billion dollars for the year.
It would be one thing if stricter regulation fails to achieve its goal of lowering prices, but the evidence is that it does harm. The most obvious problem with price controls is limiting the availability of insurance. Insurers naturally respond to price controls by tightening their underwriting processes, forcing some consumers to turn to the rest of the market for higher premiums to get coverage. In extreme cases, lower rates may force some insurers to exit the market.
Definitive evidence of this is evident. After California mandated a 20% deductible under Prop 103 in 1988 (which was overturned by the courts), the number of auto insurance companies in the state dropped from 265 in 1988 to 208 in 1993.
AUTO INSURANCE INDUSTRY IN CALIFORNIA, 1988-1993
source: NAIC images
New Jersey, too, saw 20 insurers exit the market in the decade after the state passed a similar law, the Fair Automobile Insurance Reform Act. When New Jersey liberalized its regulatory system with part of the Auto Insurance Reform Act in June 2003, the number of auto insurers doubled from 17 to 39 and thousands of uninsured drivers entered the system.
Similar results were seen in South Carolina, where a reinsurance policy in the 1990s forced 43% of drivers into the remaining market policies administered by the state reinsurance agency. After adopting the flex-band freedom law in 1999, as in New Jersey, the number of insurance providers in South Carolina doubled, the rest of the market decreased (and, today, only 0.007% of the market), and all these prices. he fell.
Even in Massachusetts, which still has mandatory deductibles, changes passed in April 2008 to allow insurers to offer competitive rates (previously set by the Commissioner for all carriers) had a significant impact. Within two years of these changes, rates dropped by 12.7% and twelve new carriers began serving the state.
Because it is still a highly regulated state, Massachusetts still has a large residual market. According to data from the Automobile Insurance Plan Service Office (AIPSO), in 2022, 3.38% of Massachusetts insurance customers had to go to the aftermarket, which is the second highest in the country. But before 2008, the remaining market share in Massachusetts was twofold. The only state with two market segments remaining today is North Carolina, not coincidentally also the only state that still relies on rates set by the tax office.
Finally, control is not free. In order to pay for the additional financial professionals and financial analysts needed to implement the new system in Illinois, HB 2203 requires that insurers involved in their coverage be assessed an additional fee of 0.05% of their annual income. Based on the 2021 fees, that’s an additional $14 million per year, adding to the $106.4 million in fees and assessments the department already provides to companies (not to mention $515 million in base taxes). The cost of this payment, of course, is passed on to the consumer in the form of an increase in the rate.
And what does that extra money get you? In 2021, Illinois spent $ 67.8 million on insurance regulation (that is, one should note, about $ 40 million less than it already collects on payments and tests). California, by contrast, spent $245.5 million. However, California’s market is less competitive than Illinois’, and arguably smaller.
The country of Lincoln needs to realize that this is a serious matter.
Heads
Illinois