Insurance PolicyTag Archives

The market for insurance in the US is somewhat unusual. In most every other line of business, companies are allowed to compete with each other across state lines. This helps to keep pricing and the quality of the product to higher levels and protect the consumer. But, the insurance industry is licensed and regulated state-by-state. There’s no such thing as a federal insurance policy. You have to buy a policy written by a company licensed in the state where you live. This is frustrating because, if you live near the border, your friends and colleagues at work probably tell you how little they pay or complain you have the better deals. Either way, it’s not very fair. Worse, the companies often decide not to set up in all fifty states, but pick and choose where they will operate. The result is that many states only have a small number of licensed insurance companies. Because there is no real competition, their premium rates tend to be high. This produces a big political divide. In Republican states, this is the free market at work and no intervention is necessary. If you do not like this, move to another state which has lower rates. In Democratic states, there is more interest in protecting consumer interests. Some states have intervened in their local markets to introduce “managed competition”. Needless to say, this has outraged the insurance industry and the insurance agents who survive on the commission earned from the insurers. There have been heated debates between the lawmakers. Where the local Department or Office of Insurance has produced new rules, they have been referred to the local courts. Who would have thought helping millions of average people to save money on their premium rates would produce so much heat.

Anyway, the latest state to surface in this national debate is Massachusetts. In some ways, this state is also slightly nonstandard because of the dominance of the local agents who handle about 80% of the insurance business. Agents have more to lose if the markets are opened up to competition (and sites like this offer a direct line to insurance companies without having to go through an agent). Not surprisingly, they have been the fastest to the courts in the fight to protect their income. We have just had the decision of the Massachusetts Supreme Court on two rule changes made by the state’s Insurance Commissioner Nonnie Burnes (she has since retired to a university post). Let’s start with the effect of the move to open up the state to competition. Before the rule changes, there were nineteen insurers writing auto insurance policies. Twelve more companies have now entered the markets. In most cases, premium rates have been stable as insurers cut their costs and accepted a reduced profit. But agents have been hit because the opportunities to earn commission have been reduced.

The Massachusetts Supreme Court has supported the reforms, finding the effect of managed competition is sufficiently beneficial that it should represent the prevailing public policy in the state. Put another way, the judges think the many consumers should pay less rather than the few corporate officers and stockholders earn excessive profits. Because one of the agent’s automatic rights to a commission has disappeared, they will be looking to recover their losses in other ways. There are two morals to this story. The first is that, if you want to find cheap auto insurance, support the lawmakers in those states who promise to introduce more competition into the car insurance market. Secondly, always get your auto insurance quotes through a site like this and avoid agents who earn commission.