NCPA - National Center for Policy Analysis

Regulatory Death Spiral

March 9, 2011

Homeowners insurance price regulation has been a dismal failure for consumers because it creates a dysfunctional market that (longer term) produces higher costs and worse outcomes for consumers, compared to markets without price regulation.  States with stringent state price regulations, like in Florida and increasingly in Texas, can set in motion a course of events that produce adverse consequences for consumers by transforming a functioning market into a high-cost, less solvent market -- a process referred to in this study as the regulatory death spiral, says Stephen B. Pociask, president of the American Consumer Institute Center for Citizen Research.

This regulatory death spiral begins when state regulators try to hold insurance prices below their natural market equilibrium level, which creates market shortages and drives insurers, particularly large multistate insurers, out of the state market.  When this happens, it decreases the capital funds that insurers reserve to pay for consumer claims.

  • The best solution for policymakers is to avoid this regulatory death spiral by staying away from price regulation, instead protecting consumers with solvency regulation and encouraging price competition.
  • In turn, this will attract market participation and capital back to the state, hereby lowering prices for consumers without sacrificing solvency.

Source: Stephen B. Pociask, "The Regulatory Death Spiral: Why Price Regulation of Homeowners Insurance Means Consumers Pay More," American Consumer Institute, February 9, 2011.

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