Policy Documents

Revisiting the Lingering Myths about Proposition 103: A Follow-Up Report

David Appel –
September 1, 2004

There is a well-established consensusamong scholars of insurance regulationthat government regulation of the pricesof insurance products reduces consumerwelfare and stability in the insurancemarketplace. Indeed, a variety of scholarlystudies have been done demonstrating theadverse impact that price controls have oninsurance consumers in several state-specificcontexts (Massachusetts, New Jersey, andSouth Carolina).1 Nevertheless, price controlregimes remain an intrinsic part of theregulatory systems of many states.

Since the evidence strongly supports market-based pricing as the best regulator of theprices of insurance products, proponents ofgovernment price controls have searched fora dramatic counterexample to support theirposition and pointed to one state-specificcase that appears to support their case. Areport written by the Consumer Federationof America (CFA) in 2001, entitled Why NotThe Best? claimed, among other things, thatCalifornia’s Proposition 103 (which instituteda system of rigid price regulation in the state)saved California auto insurance consumersover $23 billion between 1989 and 1998. Inaddition, it also cited statistics on the changein insurance premiums in California andelsewhere, purporting to demonstrate thatunder state-administered price regulationconsumers were subject to rate decreases,while elsewhere in the US, rate increasesoccurred over the same time period.

In October 2001, Milliman issued a detailedquantitative analysis of the claims in theCFA study.2 Broadly speaking, the principal conclusions of our research were that thevast majority of the savings to Californiaconsumers were due to reductions in autoinsurance loss costs, not regulation of prices,and that the loss cost reductions had little todo with Proposition 103.

This paper provides updated empiricalanalysis of a portion of our earlier study,in order to address the unsupported claimsabout Proposition 103 and the California autoinsurance marketplace that are being repeated.In addition to quantifying the impact ofloss costs on insurance rates, we also arecommenting on several other economicarguments being made about insuranceproducts and the competitive market processoverall. We are providing an analysis ofthese claims because they have importantimplications for the reform solutions being discussed.