When an industry is subject to government price regulation, it becomes a political issue in every election. This year is no different.
Bill White and Rick Perry are trading barbs about the regulation of insurance prices in Texas, with Perry bragging about his strong regulation and White complaining about lax regulation. Driving the discussion is the high price of homeowners insurance in Texas.
As Patrick Moynihan once said, "Everyone is entitled to his own opinion, but not his own facts." So when politicians call for increased regulation of homeowners insurance rates and portray the industry as profitable price-gougers, it's worth noting that these positions miss some very important facts.
First, Texas does have large coastal areas and severe weather in other parts of the state, which explains in part why rates are higher.
Second, insurance rates are already subject to extensive price regulation by the Texas Department of Insurance, to the point that the insurance commissioner can force companies to lower rates and refund premiums even if they have been in place for years. The commissioner also approves or disapproves the rates for the state-governed high-risk pool for coastal and other high-risk properties, disallowing rate increases requested by the staff and board, and thereby putting the fund at risk of insolvency. So, if the current regulatory system is a failure, it can hardly be blamed on the lack of price regulation.
Third, what politicians do not point out is that the regulations themselves are partly responsible for the state's higher rates. Regulators routinely try to push mandated benefits and extra costs into premiums, including regulatory compliance costs, evacuation costs and so on. The state windstorm fund and high-risk pool are undercapitalized for the next major storm, but they will be bailed out by forcing assessments onto insurance companies, who include these regulatory risks and costs into the rates of other consumers. One American Consumer Institute study estimated that regulations add $200 to Texans' average premium. If you want to find a state with lowest homeowners insurance rates, just look for the states with competition-driven insurance markets and less regulatory interference.
Fourth, there is no economic theory that justifies the rate regulation of an industry with so many competitors -- about 125 in Texas. If one company raises its prices too high, there is an opportunity for 124 others to win market share. That is how price competition works. However, when regulators set the price, there is no price competition -- and consumers lose.
Fifth and last, average underwriting profits for the homeowners insurance industry has been negative over the last 10 years. Artificially decreasing prices through more rate controls would send companies packing, decrease underwriting capital that protects consumers, and increase insolvencies. This is already the case in Florida, where politically motivated rate regulation has run amok, many insurance firms have left or gone belly-up, and some consumers are buying two homeowners policies because of insolvencies -- and all of this without a single hurricane in Florida in the last five years. Did I mention that prices are the highest in Florida?
Price regulation is a failure and harms consumers. Demonizing the insurance industry may be a short-term political strategy, but it's a reckless one, because solvency regulation is much more important than price regulation. When prices go too low, consumers aren't assured that their claims will be paid. What then is the purpose of insurance? Some politicians need to check their facts, if they really want to "stick up for consumers." A better public policy would be to attract capital into the state, prevent insolvency and encourage price competition. That is, if the facts matter.
Check with us at Evans, Ewan & Brady to see if your Georgetown TX Homeowners Insurance is right for you!
Bill White and Rick Perry are trading barbs about the regulation of insurance prices in Texas, with Perry bragging about his strong regulation and White complaining about lax regulation. Driving the discussion is the high price of homeowners insurance in Texas.
First, Texas does have large coastal areas and severe weather in other parts of the state, which explains in part why rates are higher.
Second, insurance rates are already subject to extensive price regulation by the Texas Department of Insurance, to the point that the insurance commissioner can force companies to lower rates and refund premiums even if they have been in place for years. The commissioner also approves or disapproves the rates for the state-governed high-risk pool for coastal and other high-risk properties, disallowing rate increases requested by the staff and board, and thereby putting the fund at risk of insolvency. So, if the current regulatory system is a failure, it can hardly be blamed on the lack of price regulation.
Third, what politicians do not point out is that the regulations themselves are partly responsible for the state's higher rates. Regulators routinely try to push mandated benefits and extra costs into premiums, including regulatory compliance costs, evacuation costs and so on. The state windstorm fund and high-risk pool are undercapitalized for the next major storm, but they will be bailed out by forcing assessments onto insurance companies, who include these regulatory risks and costs into the rates of other consumers. One American Consumer Institute study estimated that regulations add $200 to Texans' average premium. If you want to find a state with lowest homeowners insurance rates, just look for the states with competition-driven insurance markets and less regulatory interference.
Fourth, there is no economic theory that justifies the rate regulation of an industry with so many competitors -- about 125 in Texas. If one company raises its prices too high, there is an opportunity for 124 others to win market share. That is how price competition works. However, when regulators set the price, there is no price competition -- and consumers lose.
Fifth and last, average underwriting profits for the homeowners insurance industry has been negative over the last 10 years. Artificially decreasing prices through more rate controls would send companies packing, decrease underwriting capital that protects consumers, and increase insolvencies. This is already the case in Florida, where politically motivated rate regulation has run amok, many insurance firms have left or gone belly-up, and some consumers are buying two homeowners policies because of insolvencies -- and all of this without a single hurricane in Florida in the last five years. Did I mention that prices are the highest in Florida?
Price regulation is a failure and harms consumers. Demonizing the insurance industry may be a short-term political strategy, but it's a reckless one, because solvency regulation is much more important than price regulation. When prices go too low, consumers aren't assured that their claims will be paid. What then is the purpose of insurance? Some politicians need to check their facts, if they really want to "stick up for consumers." A better public policy would be to attract capital into the state, prevent insolvency and encourage price competition. That is, if the facts matter.
Check with us at Evans, Ewan & Brady to see if your Georgetown TX Homeowners Insurance is right for you!
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