̽»¨¾«Ñ¡

Drivers Benefit from Competition, Not Stifling Regulation, Says I.I.I.

INSURANCE INFORMATION INSTITUTE
Contact: Press Offices
New York: 212-346-5500; media@iii.org
Washington, D.C.: 202-833-1580

NEW YORK, April 25, 2008 - Competition amongst U.S. auto insurers is vigorous and growing, providing the nation's drivers with more choices than ever before. At the same time, the cost of auto insurance is nearly flat or falling for most drivers while the number of ways to purchase insurance and compare prices continues to expand. Efforts to impose onerous and expensive new regulations, such as California's Proposition 103, on auto insurers nationally can only raise costs and reduce the policy options available to drivers, according to the ̽»¨¾«Ñ¡ Information Institute (I.I.I).

"The Consumer Federation of America's view that costly new regulations on auto insurers are needed at a time when Americans can barely afford to put gas in the tank is incorrect and misguided," said Dr. Robert Hartwig, an economist and president of the I.I.I.

Auto insurance prices increased just 0.4 percent in 2007-just one-seventh the 2.8 percent increase in the overall Consumer Price Index (CPI) last year and less than 1/100th of the 41 percent increase in gasoline prices. "Maintaining a healthy auto insurance market and efficient regulatory structure is vital because both factors stimulate greater competition amongst insurers. Increased competition promotes more choices and savings for drivers", noted Hartwig

Dr. Hartwig's comments were in response to yesterday's Consumer Federation of America (CFA) report, alleging a variety of problems relating to price, availability and competition in auto insurance markets. "The most recent CFA study is another in a series of fatally flawed analyses whose conclusions are based on the selective use or omission of facts," said Hartwig. Details of the flaws in the four major focal points of analysis performed by the CFA follow.

1. Rates

The CFA claims that more regulation produces lower rates. The analysis is flawed for several reasons:

• The CFA uses "Average Expenditure" figures from the National Association of ̽»¨¾«Ñ¡ Commissioners-not premium rates-in its analysis. Expenditures are actually influenced by many factors other than premium rate, including decisions by individuals as to what type of vehicle they drive. For example, during much of the CFA study period (1989-2005), consumer preferences shifted toward larger, more expensive sports utility vehicles (SUVs) and higher-end luxury vehicles. The effect was to push expenditures up even if rates remain unchanged. The CFA's decision to focus on expenditures as opposed to premium rate is but one example of why its assertions are flawed and biased in a way that systematically overestimates the increase in the cost of auto insurance.
• The CFA's entire rate exercise and claim that policyholders are paying too much are without merit and are inconsistent with price trends in the general economy. Auto insurance has become less expensive in relative terms over the past two decades. The average expenditure for auto insurance increased by 50.2 percent nationally between 1989 and 2005 (3.1 percent average annual basis), well below the 55.8 percent increase in the overall CPI (3.5 percent average annual basis). Relative declines in the cost of auto insurance have continued into 2008.
• The CFA inaccurately ascribes modest increases in auto insurance costs in California to the additional regulation and restrictions placed on insurers following the passage of Proposition 103 in 1988. The reality is that crackdowns on fraud and abuse, safer cars and roads, driver education and a variety of other factors account for the majority of the savings accrued over the past 20 years.

2. Insurer Profitability

The CFA claims that there is a "slight trend towards higher profits in states with less regulation," but makes no reference to the fact that profitability during the study period used for this analysis (1997-2006), irrespective of the type of regulation, was well below commonly used benchmarks for profitability-such as return on equity (ROE)-for the Fortune 500 group of companies. The CFA study consistently neglects to make appropriate comparisons of profitability, as in the following examples:

• The CFA cites a national average auto insurer profit of 8.1 percent between 1997 and 2006. In contrast, the average profitability among the Fortune 500 group of companies (as measured by return on equity) over the same period was 13.5 percent. By this commonly accepted measure, auto insurer profitability was generally inadequate during the study period.
• Auto insurers in 49 of the 51 states (including the District of Columbia) produced average profits lower than that of the Fortune 500 between 1997 and 2006. In other words, only two states (Hawaii and the District of Columbia-together accounting for just 0.6 percent of auto insurance premiums nationally) produced profits for auto insurers that exceeded the Fortune 500 group. The CFA fails to mention this important comparison.

3. Competition

The CFA claims that states with less regulation tend to be less competitive. Using the Herfindahl-Hirshman Index (HHI), CFA produces index values for each state ranging from a low of 603 in Maine to a high of 1548 for Alaska.(1) However, the following important points suggest that auto insurance markets are, in fact, highly competitive:

• The majority of states (27 out of 50) have HHI values under 1000, which is considered to be competitive by the U.S. Department of Justice (DOJ). The remaining 23 states have values between 1000 and 1548, which the DOJ considers to be "moderately concentrated." Most major US industries fit into this latter category. Only when the HHI exceeds 1800 does DOJ consider the market to be concentrated.
• In most states, including those with higher HHI values, consumers can choose from dozens of competing insurers. Illinois, for example, had an HHI value of 1208 in 2005-among the highest in the country-yet 80 auto insurers wrote business in the state that year and the statewide average expenditure on auto insurance of $743 was $86 less than the U.S. average expenditure of $829 (average expenditure ranked 28th nationally). In other words, Illinois drivers paid about 10 percent less for auto insurance than the average driver in United States. Notably, Illinois has no restrictions on the rates insurers can charge customers. The fact that open competition leads to lower auto insurance prices is very damaging to the CFA's contention that more rate regulation leads to increased competitiveness.
• Pricing is only one of many forms of competition between insurers. Insurers compete based on customer service, claims handling, distribution channels, policy terms and conditions, optional coverages, financial strength as well as through discounts for good driving, customer loyalty and ownership of multiple policies to name just a few

4. Availability of ̽»¨¾«Ñ¡

The CFA claims that the use of certain underwriting criteria by insurers, such as credit-based insurance scores, negatively impacts the availability of auto insurance. Again, the facts tell a different story. The reality is that auto insurance is readily available to virtually any driver in every state. Consider the following measures of availability:

• The aggregate market share of state-run residual markets for auto insurance dwindled from 3.5 percent in 2000 to just 1.3 percent in 2005. These policies are now being competitively underwritten by private insurers, even though these residual markets exclusively serve high-risk drivers.
• The recent examples of New Jersey and Massachusetts suggest that deregulation increases competition in auto insurance markets. In both instances, regulatory reforms were followed by announcements of rate cuts and new entrants to the market.
• Contrary to the CFA's assertions, credit scoring has been proven to be a highly accurate predictor of loss in numerous independent studies, including two separate studies conducted in 2007 by the Federal Trade Commission and the Federal Reserve. Banning or severely restricting the use of credit scoring would not only raise costs for consumers but would force good drivers to subsidize those with poor driving records. California-heralded by the CFA as a model state for its regulation-is one of only a very few states that prohibit the use of credit scoring. Unfortunately, the ban means that millions of good drivers in the state are forced to subsidize bad drivers, while California consistently ranks among the top 20 most expensive states in which to purchase auto insurance.

"̽»¨¾«Ñ¡ rating systems-how a company assesses the risk a particular driver represents-have become more accurate and more equitable through recent innovations in underwriting technology," Hartwig said. By looking at a potential policyholder's credit score, in conjunction with many other factors such as their driving record and driving habits, insurers are able to match with greater precision the premium they charge in the context of the potential claims they may have to pay on behalf of a policyholder.

"Competitive marketplaces, safer cars, aggressive fraud-fighting and innovative underwriting have joined forces to keep down the price of an essential financial product," added Hartwig. "This is great news for all drivers, who are facing higher fuel prices and rising auto repair costs."

For more information about auto insurance, go to the .

_______________
(1) The HHI is calculated by squaring the market share of each market participant and then summing those market shares. The higher the value of the HHI, the more concentrated the market.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.