Let the Market Dictate Insurance Rates



March, 2004 

Mayor Sullivan wants the legislature to modify the formula for auto insurance rates. The solution lies not in tinkering with government regulations, but in eliminating them.

 Massachusetts’ legislators have been trying to engineer our auto insurance system for decades and they just can’t seem it get it right. But don’t blame them entirely for poor engineering. A government planned insurance market is bound to lead to inequities, inefficiencies, and illegalities … not to mention higher accident rates, injuries, and deaths.

 Only the magic of competition and the profit motive can ensure that premiums accurately reflect risks, reward safe driving practices and minimize fraud. Consider two groups of drivers. The first is systematically overcharged considering the risks they pose while the second group is being undercharged.

 In a free market insurance system, companies would be rewarded for discovering any factors (age, driving record, zip code, health, profession, marital status, children, past claims, … even shoe size, if it helps) or any combination of factors that would help them discover who was being over or under charged. By appropriately lowering the rates charged to the first group and raising premiums for the second group, a company can attract the most profitable customers and avoid unprofitable customers … and in the process, improve their profitability compared to other insurers. Those that fail in this task will have lower profitability or even incur losses and risk going out of business. The market automatically and efficiently establishes rates that are fair for all.

 But insurance premiums must cover both legitimate accident claims and the costs associated with fraud. The company that does the best job of uncovering fraudulent claims can set lower rates (thus attracting a greater volume of business) and can simultaneously achieve higher profit margins. Fraud will come to a screeching halt and average insurance rates will come down. The profit motive ensures that premiums are fair, that safe driving practices are rewarded (thus both reducing accident rates and premiums), and that fraud is minimized. All without the mindless bureaucracy of government regulations corrupted by politics and self-serving industry lobbyists.

 e current auto insurance fraud scandal in Lawrence was unnecessary. Blame the crooks and the insurance companies, but also blame our legislature. Mayor Sullivan, let’s not have the legislature reinvent the system, let’s just tell them to get out and stay out! Suggested Massachusetts auto insurance law: M.G.L. Ch.1234 – Auto insurance contracts are private agreements between consenting adults. Absent fraud, have a ball … Don’t call us, call your insurance company. If you don’t like your current insurance company or insurance rates, find another company. If you think they are all over charging, consider getting rich by starting your own insurance company. End of law.