Insurance deregulation and the public interest

Lawrence H. Mirel, Commissioner, Department of Insurance and Securities Regulation

Government of the District of Columbia

February 18/2000

Remarks prepared for a seminar on this topic sponsored jointly by the American Enterprise Institute and the Brookings Institution.

Lawrence H. Mirel Commissioner District of Columbia Department of Insurance and Securities Regulation

Professor Harrington has made the case well for deregulating property and casualty insurance rates and forms. My role here today is to report on the impact of one such deregulation on the private passenger auto insurance market in the District of Columbia.

1. History

The District of Columbia, an entirely urban jurisdiction with a high number of automobile accidents, has historically had one of the highest private passenger automobile insurance rates in the nation1. For that reason there has been political pressure to control rates through government intervention, and until a competitive rating law was enacted in 1996 the District had a law requiring prior approval of rates for private passenger automobile insurance.2 Except for workers’ compensation, no other property or casualty insurance was subject to prior approval of rates, although the Commissioner always had (and has) the authority to review rates to determine that they are “adequate, not excessive, and not unfairly discriminatory,”3 and to order that rates not in conformity with this standard be modified prospectively.

Starting in the 1980s the market for private passenger automobile insurance became progressively distorted, as the then-Insurance Administrator refused to approve rates she considered too high. Particularly hard hit were those standard and non-standard writers whose criteria for obtaining insurance were looser than for the preferred writers, and whose rates therefore needed to be higher. Companies such as Dairyland and Progressive moved out of the District market entirely in those years, and subsidiaries of preferred writers-such as the Criterion standard writer of the GEICO group-wrote little if any business in the District. As a result, the assigned risk program (AIPSO) grew very large, eventually insuring as many as one in four insured drivers in the District. District drivers with one or more accidents or speeding tickets on their record were unable to obtain insurance in the voluntary market and had to go to the assigned risk plan, or else go without insurance entirely, as many did. For independent agents, the lack of standard and non-standard writers meant they could offer nothing except the assigned risk plan (for which the commissions were very small) to customers who did not qualify for preferred policies. Most preferred policies were (and are) sold directly or by company agents, so that the lack of competition in the standard and non-standard markets had a depressing effect on the activities of independent agents in the District.

2. Rate deregulation

In 1996 the Council of the District of Columbia enacted a law that, among other things, abolished prior approval of private passenger automobile insurance rates4. Those who argued in favor of the change-primarily people from the auto insurance industry-claimed that competitive rating would attract more insurers to the District, and that the increased competition would result in lower premiums, more choices, and fewer people going into the assigned risk plan. Those who opposed the change, including at the time the Insurance Administration, were concerned that without the prior approval mechanism, rates would soar. The Council, when enacting the law, included a provision that required the insurance regulator to report back to the Council in two years on the impact of that law on price and competition in the private passenger auto insurance market in the District. The report, which was almost a year late, nevertheless provided stark evidence that the supporters of the change were correct; the change produced more competition, reduced the numbers in the assigned risk pool, and lowered rates overall.

3. Impact of deregulation

Almost immediately after enactment of the competitive rating law, standard and non-standard companies once again started writing in the District. Progressive Insurance Company moved back into the District market in 1997, selling both standard and preferred products. Other companies, such as Travelers and Liberty Mutual, once again started competing for customers in the District, and a number of companies that wrote only preferred insurance before 1997 began writing standard auto insurance in the District, including GEICO, State Farm, Allstate, Nationwide and USAA. The trend has continued. Only recently two additional companies, Response Insurance Co. and Argonaut Insurance Company, have made filings and are starting to write private passenger auto insurance in DC Many of these companies use independent agents.

As a result of this new competition, especially in the standard and non-standard markets, the assigned risk plan quickly began to be depopulated as customers found coverage in the voluntary market. In 1997, just before the impact of the new law was felt, there were 13,395 assigned risk policies. In 1998 the number went down to 5,670, a decrease of 57.4%. In 1999 the number went down further to 2,120, a decrease of 62.6% over 1998. Altogether, from the time the competitive rating process kicked in until the end of 1999 the assigned risk plan was reduced by 84.2%.

Under the file and use provisions of the new law the companies feel free to make more frequent filings. In the fourth quarter of 1996, just before the new law took effect, there was one private passenger auto insurance rate filing. In 1997 there were 12 rate filings. In 1998 the number went up to 17, and in 1999 there were 20. As is to be expected, some of the filings were for increases, but most were for decreases-decreases of as much as 15%. Overall, according to the NAIC Fast Track data, from 1996 through the second quarter of 1999 the average earned premium on private passenger auto insurance in the District of Columbia declined by 5.5%.

4. Conclusion

The competitive market place works. Perhaps not at all times and in all places, but in the District of Columbia in the waning years of the 20th century, replacing a prior approval rate system with a file and use rate system stimulated the private market, providing more choices and lower rates for consumers, as well as more business opportunities for insurers and for insurance agents.

1According to figures published by the National Association of Insurance Commissioners (“State Average Auto Premium and Expenditures Report”), the District in 1998 had the second highest private passenger auto insurance premium rates in the nation, next to New Jersey. It should be noted that the District of Columbia often, as here, is compared with states, which is somewhat misleading since the District is in reality a city. Even among cities, however, the District’s rate is high.
2Congressional law of May 20, 1948, 62 Stat.243, ch.324, Sec. 3, as amended, formerly codified at DC Code 35-1703(f)(2).
3DC Code 35-1703(f)(2).
4Automobile Insurance Amendment Act of 1996, eff. Sept. 20, 1996 (DC Law 11-60; DC Code sec. 35-1703).

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