NCPA - National Center for Policy Analysis

Regulated Insurance Rates Increase Premiums For Average Consumers

August 29, 2002

Proponents of insurance rate regulation argue that regulations protect consumers from paying too much for insurance by suppressing rates for high-risk individuals. However, a recent study shows that while rate regulation makes coverage more affordable for some, it increases the cost to the average consumer.

Rate regulation is associated with large residual markets, where insurers are obligated by law to insure high-risk individuals at affordable rates. Insurance providers lose money on residual markets because the revenue generated at suppressed rates is often much lower than what insurers spend recovering damages for high-risk individuals. When rates are raised to make up the deficit, the burden is borne by the average consumer.

The benefits of regulatory reform are clear. Prior to the 1999 rate reform of the auto insurance industry in South Carolina, it boasted a residual market of 40 percent -- the largest in the nation.

Following reform:

  • The number of insurers doubled, making more choices available to consumers.
  • Competition drove down the average premium when compared to other states.
  • The 40 percent residual market was greatly reduced as more insurers specialized in high-risk motorists.

The bottom line is rate regulation is an inefficient tool for protecting consumers from paying excessively high insurance rates. Regulating insurance rates to keep them low for all drivers, including high risks, actually drives prices up for the average consumer. Rate deregulation is the only solution that keeps rates low for the average consumers.

Source: Scott Harrington, "Deregulating the Insurance Industry: The Key to Providing Quality, Cost-effective Consumer Protection," The State Factor, July 2002, American Legislative Exchange Council, 910 17th Street, N.W., Fifth Floor, Washington, D.C. 20006, (202) 466-3800.


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