"Regulators Should Trust Free Market Principles "

The following is an excerpt from a September 11, 2007 article from the Tyler Morning Telegraph.

September 11, 2007

"Many people want the government to protect the consumer," said the late economist Milton Friedman. "A much more urgent problem is to protect the consumer from the government."

That's how the Texas Public Policy Foundation's Bill Peacock begins an excellent explanation of the problems in the Texas insurance industry.

"Since World War II, regulation of insurance has been justified in the name of ensuring 'affordable' prices," Peacock writes. "Experience, however, shows that regulation has led to wild swings in prices and availability."

Regulation in Texas should focus on two things.

"States like Illinois and South Carolina have proven that a modernized regulatory approach focusing on fairness (ensuring that the cost to a policyholder reflects his level of risk) and solvency (ensuring that companies have the financial resources to pay claims) in lines such as auto and homeowners' insurance creates a more stable and healthier industry," he contends. "Since their reforms, both states have seen more companies enter the market, stable rates, and smaller residual markets."

That has benefited consumers.

"A study that compared Illinois' auto insurance market to other comparable states found Illinois to have more predictable 'rate levels, lower consumer prices, the highest number of insurance carriers in the nation, and a low number of uninsured drivers,'" he says. "Texas insurance regulators, however, operate as though none of this has taken place."

Regulators here have a different focus, and get much different results.

"This summer, the Texas Department of Insurance rejected or threatened to reject three rate filings by two different insurers," Peacock reports. "And this week, they are preparing to 'crack down' on affiliated business arrangements - where one company owns or controls another and is in a position to refer business to the controlled business - in title insurance, ignoring the obvious efficiencies gained by such arrangements."

Texas assumes that government, not the free market, is the best protection for consumers.

"This approach to regulation turns on the notion that without government oversight, insurance companies will take advantage of consumers," Peacock says. "They make this assumption based on the fact that a few insurers tend to serve the majority of the homeowners' market, and thus can exercise 'market power' over consumers."

There's a strange logic to this reasoning.

"If competition was working in the homeowners' market, critics contend, more people would have left the larger providers and chosen providers that offered lower prices," Peacock explains. "They claim the existence of consumers sticking with higher prices is proof that consumer choice is not readily available; thus consumers need protection from the larger companies who are profiting at their expense. Of course, no standard is ever offered for how much business the large firms should lose before competition is considered optimal."

Research, though, shows that consumers look at more than price when making choices.

"Consumers sticking with one provider in the presence of lower prices elsewhere can be an indicator of a healthy, highly-competitive marketplace," Peacock explains. "While the Internet allows consumers to search and frequently switch to alternative providers, 'branding, awareness, and trust' make consumers willing to pay higher prices to retailers that they have previously dealt with."

The insurance industry is no different from other consumer-driven market.

"Consumers reign supreme in the marketplace," Peacock says. "Nobody forces consumers to buy electricity, insurance, or cell phones from a particular provider - unless it's the government restricting availability via regulation, as it has done with telephone and electric service in recent times."

Texas regulators should learn to trust free market principles.

"Every time consumers buy insurance or pay their electric bill, they signal that they have made an affirmative choice that satisfies their individual preferences," Peacock points out. "If the price and product is good enough for consumers, it ought to be good enough for the government as well."

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