Competition, not Regulation

Published August 26, 2008

Preventing fraud and enforcing contracts is a key role that government plays in maintaining a stable market. Some say it should be the government’s only role. New York recently took a step in the right direction by moving towards a more competitive flex-rating insurance system. But it may be taking a few steps backwards with its recent intervention into auto insurance rate-making (“Driving Is Down, but Auto Insurance Rates Are Rising,” August 22).

Regulators in New York recently convinced Geico, a major auto insurer, to withdraw its rate increase request, saying the insurer did not take into account the falling number of miles being driven and increasing gasoline costs. While ensuring accurate cost figures is important, New York regulators are embarking on a slippery slope back towards de facto prior approval and insurance price controls.

The goals of an insurance regulator should be to lower barriers to market entry and to encourage competition, which in turn leads to more products being made available at lower prices. A flex-rating system is preferable because it allows the insurer to react more quickly to changes in risk and the economy. Insurers must maintain solvency, which means premium rates must cover costs, or the insurer may not be able to cover claims in the event of an emergency.

According to a recent Heartland Institute study on state insurance regulation and competitiveness, state insurance markets thrive — and serve consumers best — when they are unencumbered by excessive regulation and allowed to develop in a competitive environment. New York earned a “D” in that study, a grade that was likely to improve with the flex-rating system.

New York should be wary of taking a significant step backward. Competition, not regulation, provides the surest path toward a strong auto insurance market for New York.

Matthew Glans ([email protected]) is a legislative specialist for The Heartland Institute.