The Pros and Cons of Car Insurance Regulation - Case Study: California & State Farm

The car insurance industry is regulated by state governments, and as a result, there are 50 separate sets of car insurance rules (51 if you count D.C.). Some states have more "consumer-friendly" regulatory environments, while others are considered to be "pro-business." The truth is that regulations have both positive and negative effects, as evidenced by the current situation in California.

The Case of the Lame-Duck Insurance Commissioner
Each state has its own Insurance Commissioner (IC), a person who serves as the head of the state’s insurance board. As his term was approaching its end, California’s IC, John Garamendi, was determined to make an impact while he was still in office. Garamendi had actually begun the process six months earlier, in June of 2006, when he called on California’s four largest insurance companies - Farmers, Safeco, Allstate, and State Farm - to justify their rates. It was Garamendi’s opinion that these companies were charging too much for both homeowner’s and car insurance.

In California, companies must justify their rates when called on to do so, but instead of going through that lengthy and expensive process, State Farm jumped the gun by requesting the insurance board’s permission to lower its rates. Essentially, State Farm was admitting that it was charging too much and offering to charge less in order to avoid additional scrutiny. The total amount that will be saved by State Farm’s customers in 2007 will be $500 million - including $259 million by its car insurance customers!

The Downside of Regulation
As a result of California’s Insurance Commissioner’s actions, the average State Farm customer in California will save 10% on his or her car insurance bill. Since State Farm will be dropping its rates, its competitors will have to follow suit or risk business to State Farm. So what could be the downside?


Think about it - State Farm had to ask permission to lower its rates! In California, companies are forbidden from radically lowering their rates without the insurance board’s consent. Now in this case, things may be working out fine, but in the future, what is to stop the other car insurance companies involved from using their political clout to prevent a competitor from lowering its rates? We all know how politics works!

In other words, car insurance regulation keeps prices up as much as it keeps them down, and even less stringent regulations have unintended consequences. Would we be better off in a laissez-faire regulatory environment? Probably not; especially since car insurance is the one product that the government says you have to buy. But the important thing to realize is that even the most well-intentioned regulations can have adverse effects, and that both the pros and cons of all regulatory legislation should be thoroughly evaluated.

It’s Your Choice
Sometimes it isn’t just the bureaucrats at the state capital who get to decide. For example, Oregon voters recently had the opportunity to cast their ballots for or against a measure deciding whether or not insurers could consider an individual’s credit score when determining his or her car insurance rates. The citizens struck it down, probably because most voters have above average credit, and they knew that giving good drivers with bad credit a break on their rates would translate into higher rates for both good and bad drivers with good credit.

Regardless of direction in which the political winds are blowing, you can always save on your car insurance. Shop around for the best deal, but first, browse this site to become familiarized with how car insurance works. Not only will you be a more educated voter and citizen, but you’ll also have the knowledge necessary to save money on your rates.