Marc Hyden: Lawmakers Mull Good, Bad And Ugly Insurance Reforms

Property and casualty insurance regulation is unlikely to capture voters' undivided attention on any given day. Most people find it about as interesting as long division, or as Mike Fotis of Smart Money People put it: "The insurance industry is the boring uncle of the financial services family — a little drab and likely to be found in a basement…"

Even though just about every American has insurance of some kind, there may be some truth to Fotis' light-hearted characterization, and perhaps as a result, auto and homeowners insurance doesn't tend to be top of mind for lawmakers or voters. However, that sentiment can suddenly change when premiums begin to rise. This has been the case in Georgia over the past several years, thanks to insurance fraud, lawsuit abuse, natural disasters and increasingly complex and expensive auto components.

Now suddenly this supposedly dull topic is at the forefront in the Georgia legislature, and lawmakers have since introduced a flurry of insurance bills — some reasonable, others dangerously misguided. Depending on the General Assembly's mood, it could transform the insurance market, and this should matter to every person with auto or homeowners insurance.

For those of you who aren't unabashed insurance nerds, consumers are best served when there is ample competition within the insurance market and when it isn't overburdened by excessive red tape. This helps drive down rates and encourages new products that are tailored to various customer needs.

On the bright side, the Peach State's insurance market shows signs of ample competition. "Georgia has over 400 personal home and automobile insurers," reports Insurance News Net, but that doesn't tell the whole story. "While Georgia is the tenth-largest state for Property and Casualty premiums, it ranks 50th out of 51 among the states and D.C. for insurance company profitability."

A host of factors, like lawsuit abuse, have made it difficult for insurers to make money in Georgia. This has led some to leave the state entirely or raise their rates to stay in business. While commonsense tort reform has since passed and provided insurers and insureds some relief, pressures remain — and officials want to act.

Instead of looking at market reforms, some lawmakers would rather bind insurance companies' hands. Two pieces of Senate legislation aim to prevent insurers from using geography or credit information when setting rates.

These are incredibly problematic ideas. Insurance rates need to be determined based on risk and the likelihood of paying out claims. If insurance companies can't adequately predict these outcomes, then they can't make money, and geography and credit information are actuarially credible factors. If someone lives in a neighborhood where 50% of cars are stolen, then their auto rates should reflect this. Similarly, the use of credit-based information is a proven method of predicting whether someone will submit an insurance claim, and it does so without being unfairly discriminatory.

A third piece of Senate legislation would fundamentally alter how insurance is regulated by moving to a prior approval system, like the one that helped decimate California's insurance market and continues to be a source of its insurance woes. It would essentially forbid insurers from introducing new rates and forms of insurance without first obtaining the elected insurance commissioner's approval. This creates the incentive to keep rates so low that lines of insurance are not profitable and places important private business decisions in the commissioner's hands.

Thankfully, these three pieces of legislation failed to meet the Crossover deadline, which effectively means they are dead, but Georgia bills are a lot like zombies. They are rarely truly dead and tend to rear their ugly heads when you least expect it.

The House of Representatives, meanwhile, has promoted several proposals that have a more plausible path to enactment. One bill "would require rate decreases by insurance companies that notch profits exceeding 5% of projections for three straight years," according to Capitol Beat. This may receive plaudits from voters, but during the hearing, lawmakers struggled to recall the last time a Georgia auto insurer enjoyed three years of "excessive profits."

Another House proposal may hold the most promise for Georgians. If passed, the bill would help combat insurance fraud and crack down on uninsured motorists. The hope is that, combined, this will keep insurance premiums lower without constraining insurers to the point of exiting Georgia.

In most years, insurance regulation might not dominate headlines, but after years of premium increases and broader affordability issues hindering Georgians, it has become top of mind for many elected officials. They have two paths before them — institute smart market reforms or over-regulate insurers out of existence.

If legislators choose wisely, then insurance can go back to being the drab basement-dwelling topic it once was.

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