Ending Public Utility Style Rate Regulation in Insurance

Abstract

Many property-casualty insurers are subject to an elaborate state-based regulatory regime that enforces prohibitions against “excessive” and “unfairly discriminatory” rates. Extensive economics research suggests that this regulation is not in the public interest. Building on this literature, this Essay suggests that insurance rate regulation evolved out of a set of market and regulatory conditions that no longer prevail in most property-casualty insurance markets. The persistence of traditional insurance rate regulation in many states thus represents a failure of these jurisdictions to evolve along with the markets they oversee. In developing this argument, the Essay shows how insurance rate regulation emerged out of the view that property-casualty insurance markets share key characteristics with natural monopolies. In both settings, unique market conditions were understood to “naturally” stymie socially-beneficial competition. And in both settings, states tolerated these naturally-occurring anticompetitive market conditions, but subjected firms in these markets to extensive rate regulation designed to prevent excessive or unfairly discriminatory rates. Despite these parallels in their development, modern-day insurance markets no longer resemble natural monopolies. Insurers can, and do, compete vigorously in ways that promote social welfare and do not rely on plausibly anti-competitive practices. Preserving public utility style insurance rate regulation makes little sense in light of these shifts in insurance market structure, even if insurance rate regulation oriented towards broader social goals like privacy and social mobility remain sensible.

Keywords: Insurance, State Insurance Regulation, Rate Regulation, Unfair Discrimination, Excessive Rates