IN GOOD HANDS WITH ALL THOSE STATES?

One must feel sympathy for Allstate, coping as it must with a thicket of laws, regulations and fees in 49 states as it tries to sell insurance for homeowners and drivers. (See story by Carrie Coolidge.) Or rather, sympathy for its customers. Ultimately, the cost of regulation is passed along to them. And the insurance business is the most politicized, controlled and micromanaged industry in America. That's because it is regulated by the states and not the federal government.

If the states had any faith in free markets, they would ascertain that insurers have enough assets to pay off claims and then let price competition take over. That faith is lacking. So we have states getting very involved in rate setting. The worst is Massachusetts, where the Allstate brand is not to be found, but California is a close second with its new pricing rules, and just about all the states stick their fingers in the pie to some degree.

If actuaries had a free hand, they would discriminate against all sorts of statistically dubious groups. They would charge extra for drivers living in accident-heavy urban areas, for homeowners who insist on building in the path of hurricanes, for deadbeats (turns out there's a correlation between low credit scores and accident-proneness) and for teenage boys. To a committed egalitarian, discrimination is the stuff of wickedness. But a 17-year-old, even one with a clean record, is a high-risk character. Amusing fact turned up in a survey of teenagers by Allstate: 12.8% admit to having read or written text messages while driving.

State regulation is definitely good for teenagers in Boston and for tipsy drivers in the assigned-risk pool. But is it good for consumers overall? Let's put it to the test. The system as it stands now keeps 10,000 state employees busy and runs up a tab of $1 billion a year. That money is extracted in the form of fees from insurers, who pass the cost along to their customers. Let's let any insurer opt out of state regulation in favor of a federal charter. (I'll bet Allstate, Progressive and Geico would go federal in a heartbeat.) Relieved of 50-state paper-pushing burdens and free to pick off the good risks with price cuts, the federally chartered companies would be a formidable competitive threat.

~~~~~~~~

By William Baldwin