The tale of two states

For years the insurance industry has fought desperately to reduce or eliminate burdensome governmental regulation, insisting that competitive market forces will adequately regulate the industry. Deregulation has dominated the insurance public policy debate on both the state and federal levels.

One major roadblock in the effort to deregulate the insurance industry is the failure of the insurance market to make insurance available or affordable in areas with catastrophe exposures to hurricane, earthquake, flood and terrorism. The industry faces an inherent public policy conflict when they ask government to assume large catastrophe exposures, while at the same time asking government to deregulate the industry and allow competitive market forces to regulate the availability and affordability of insurance.

Public policy developments in Louisiana and Florida over the past year provide a clear dichotomy in this public policy debate. The market response of the insurance industry (or the lack thereof) to the actions of these two states will shape the public policy debate of insurance regulation for years to come.

Florida has chosen a model of extensive government intervention in the regulation of the private insurance industry and the direct assumption of catastrophe risk by government insurance programs. This socialist agenda was led by a conservative Republican governor.

Contrast the Florida model with developments in Louisiana over the past year. Louisiana is infamous as a politically populist state. In the wake of Hurricanes Rita and Katrina, the worst natural disaster in American history, insurance is both unavailable and unaffordable in south Louisiana — where 70 percent of the state population lives. Insurance industry and political observers expected Louisiana to respond with legislation to “protect” consumers. Instead, led by a Democratic governor and a Republican elected insurance commissioner, Louisiana bet its future on market based deregulation efforts.

Over the past couple of years, Louisiana has:

• Established one of the toughest statewide building codes in the nation.

• Completely revamped flood protection management and poured billions of federal and state dollars into meaningful flood protection.

• Replaced the last “prior approval” insurance rating commission in the nation with “use and file” rating in commercial lines, and “file and use” rating in personal lines.

• Established a $100 million capital and surplus incentive program, which provides dollar for dollar capital matching grants to insurers who agree to write property insurance in Louisiana. This provides government incentive for the private market to provide coverage for catastrophes, rather than mandating a government solution.

• Insurance Commissioner Jim Donelon has maintained an insurance regulatory environment that is sensitive to the needs of the insurance industry, while balancing consumer interests.

The insurance industry has argued that states which reduce regulation and create an environment where insurers are able to properly price their product and manage their business will have insurance market capacity to maintain available and affordable insurance. Public policy makers in Louisiana are hopeful but skeptical that the insurance market will respond to their efforts by creating new capacity.

A clear choice

The tale of two states — Louisiana and Florida — presents the insurance industry with a clear choice and the opportunity to prove that competitive market forces really work. If the insurance industry responds to the market oriented public policy opportunities in Louisiana with increased market capacity, public policy makers will be encouraged to reduce governmental regulation and let the market regulate itself. On the other hand, if the insurance industry fails to reward Louisiana with increased market capacity, Louisiana (and other states) will learn that Florida was right — the only solution left is to solve insurance market problems with direct government intervention.

Public policy makers nationwide are watching the tale of two states to see if government intervention or free market forces are the appropriate solution to insurance market problems. The insurance industry will decide what lesson public policy makers will learn.