With a gazillion insurance companies in the U.S writing homeowners and automobile insurance why don't we observe more price competition? It seems almost counter- intuitive that an industry characterized by such a large number of competitors could avoid it.
Oh sure, GEICO and Progressive pay lip service to low rates in their advertising. But at the end of the day you'll find their rates compare pretty closely to State Farm, Allstate or Everybody Else Mutual for that matter. The answer to this anomaly starts with our benevolent federal government, which for the last sixty plus years has given the insurance industry and the Insurance Services Office (ISO) a complete pass on the anti-trust front.
When congress enacted the McCarran Ferguson Act in the 1940's, it exempted the insurance industry from federal anti-trust statutes and turned all insurance regulation over to the states. A by-product of this infamous act allowed for the sharing of cost data among insurers. In order to facilitate the accumulation of this data the industry created an entity now known as the Insurance Services Office to manage industry wide statistics. In other words to create a monster database on all things insurance. Today ISO churns an enormous profit selling this data back to individual companies to use as a basis for developing rates. Rather than each insurer relying on its own cost structure and market analysis for setting rates - the way most businesses operate - insurance companies are allowed to defer to published aggregate data. Essentially this gives each insurer the same cost structure, which by extension yields very similar prices.
Even worse state insurance regulators actually encourage this practice as it makes it easier for them to regulate rate levels. ISO shows number X will be the expected claims cost for companies in this state. Number y will be the expected overhead cost; so therefore, each company in this state is allowed to charge Z. Tell me again why we need state insurance departments to protect consumers? If states really wanted to help the consumer they would prohibit the use of aggregated cost and expense data and force insurance companies to compete like other businesses. Consumers would surely benefit from the resulting competition.
Believe it or not a few U.S. Senators have actually floated the idea of repealing the McCarran Ferguson Act - naturally for all the wrong reasons. Senator Trent Lott of Mississippi presently leads the charge, not because he recognizes the benefits of market competition over collusive rate setting. I doubt this guy could recognize the benefits of an I-Pod over a player piano. No he's essentially mad that State Farm denied his Katrina claim on his vacation home in Southern Mississippi. The esteem Senator claims he never realized his policy excluded flood coverage. Therefore, as a matter of revenge he has decided to point his guns at McCarran Ferguson. Three cheers for the accidental reformer. Nothing like an elected official using the power entrusted to him by the public to settle a personal score. Oh well, any way you can eliminate a bad law...
Unfortunately, repealing McCarran Ferguson may have no impact as presently proposed. Rumor has it Lott’s repeal legislation carves out an exception for industry data gathering. That of course would make the whole exercise moot. Why remove an anti-trust exemption and then allow the industry to continue to use collective data?
Here's an idea. How about we repeal McCarran Ferguson with no exceptions? Let's put ISO out of business. Let's force insurance companies to take the same risk and initiative as say a shoe store when it comes to setting premiums. And let's give the insurance consumer some real pricing choice when it comes to buying homeowners and automobile insurance.
Thanks for checking in...
Ed Campbell, III