The Insurance Stamp Tax Act
The National Association of Mutual Insurance Companies (NAMIC), in a paper released at its annual convention, has called for giving insurance companies complete underwriting freedom. In The Case for Underwriting Freedom: How Competitive Risk Analysis Promotes Fairness and Efficiency in Property/Casualty Insurance Markets, Robert Detlefsen, Ph.D, pleads the case.
Detlefsen sets forth how state limits on underwriting amount to another form of price regulation. Whether credit scores, loss history, geographic territory or some other factor, insurers should be able to use whatever criteria they believe most accurately assess and classify risk without states setting conditions, he argues. Detlefsen points out that while state regulation of rates gets the bulk of attention, state restrictions on underwriting also affect the price that consumers pay and “prevent consumers from enjoying the full range of benefits that come from unfettered competition.”
The paper makes the sweeping claim that unfettered risk-based underwriting promotes competition, reduces loss costs and lowers premiums. Detlefsen asserts:
“In jurisdictions where underwriting freedom prevails, insurers compete by trying to assess individual risks more accurately than their rivals do, and by refining their systems of risk classification, which permits them to more precisely forecast the losses that any given individual is likely to experience. Competitive, risk-based underwriting facilitates fairness in pricing, prudent conduct, widespread availability of coverage, and risk sharing among insurers.”
This is a picture of insurance paradise, of an industry free from public review. It pretends that the insurance industry is just like any other business and not the critical economic glue that it is.
Detlefsen makes the leap that those who believe there should be some regulation of insurance underwriting do so because they see insurance as an entitlement program. These do-gooders care about protecting urban or other high-risk individuals from the high premiums that result from pure risk-based rating.
He grants that politicians may have a legitimate interest in protecting certain citizens (and even small businesses and industries?) but insists that the insurance system is not the way to do that. Instead, the better way is a direct subsidy from the government in a program similar to food stamps. But he conveniently concludes that such a program is unlikely to happen because government officials take the easy way out:
“Rather than raise taxes to subsidize the insurance costs of high-risk groups, politicians and regulators prefer to attack risk-based underwriting practices as ‘unfair.'”
The paper extols the benefits of “unfettered” competition, but it never offers a realistic road map for how to get there, perhaps an acknowledgement of the difficulty. If it’s true that politicians are prone to take the easy way out, can the same be said of the industry? Maybe the price for more industry freedom will be the industry’s support for a tax increase to pay for an insurance stamp program.