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Why Your Insurance Premiums Are So High (and what will cause them to go down)

Government Muscle
  High insurance premiums are the natural result of
government trying to control insurance companies.

What is it with government regulators? They say they're trying to help you by intervening into the marketplace. They say they can "fix" those expensive auto insurance and health insurance  premiums by forcing insurers to make premiums more affordable for you and your family.

Then, when they show up with their laws, nothing ever seems to work out like they promised. Why not just leave insurance companies alone? Don't insurance companies have a right to exist for their own sake? Do they have a right to charge whatever they want for premiums, and then keep all of the money that isn't promised to policyholders and other creditors?

Insurance Companies Have A Right To Exist

Insurance companies are businesses. They're comprised of individuals. As such, the people and their business, by extension, have rights to life, liberty, and the pursuit of their own happiness. I suppose happiness, for a business, is the pursuit of profits. They're in business to make money. Some of them feel a bit ashamed of that fact, but that's not the point here.

There are essentially two ways one can look at actions that every human being, and their business, takes: individuals and businesses may position themselves as the beneficiaries of their own actions or individuals and businesses may position themselves as sacrificial animals. That's it.

Human beings have, by their very nature, something which other living organisms do not have. They have the power of choice. It is this choice that gives rise to the concept of "morality". When we choose to take actions which sustain our own life, we are taking actions proper to a rational being. We are doing what is good for us. On a most basic level, think about eating. When you eat a piece of food, you sustain your own life. It's good for you. What's the alternative? Death? Death is nothing--literally nothing. It's the complete opposite of good. This leads to the second choice we have in life.

When we choose to take actions which subvert ourselves or which are destructive to our own life, we are engaging in evil acts. Instead of eating that piece of food, you could act in an evil manner, doing what's wrong for the requirements of your life: you could throw that food away and death. If you die, it's "game over". You've failed to take the actions required to sustain your life. You've made the wrong choice.

The same applies to businesses. When they pursue profits, they're acting in their own best interest. When they subvert their own potential to stay in business, they're acting against their own interest. Pursuit of profits is good for a business while subversion of the business and its ability to create profits is bad.

But, what happens when someone, or some organization, forces an individual or business to act against their own best interest? Philosopher Ayn Rand writes:

Whatever may be open to disagreement, there is one act of evil that may not, the act that no man may commit against others and no man may sanction or forgive. So long as men desire to live together, no man may initiate—do you hear me? no man may start—the use of physical force against others...

...Reality demands of man that he act for his own rational interest; your gun demands of him that he act against it. Reality threatens man with death if he does not act on his rational judgment; you threaten him with death if he does. You place him in a world where the price of his life is the surrender of all the virtues required by life--

When government initiates force through regulation and interference into the insurance industry, it is comitting a moral crime. The insurance company has no choice but to comply or it will cease to exist (i.e. go out of business).

Now, let's turn our attention to rate regulation in the insurance industry. Insurance companies charge premiums for their financial contracts. You're probably familiar with this. Premiums are charged for life insurance, automobile insurance, homeowner's insurance, renter's insurance, worker's compensation insurance, and even health insurance.

The premium reflects the total cost to provide insurance coverage, transferring the financial risk of loss (covered under the insurance contract) away from you and onto the insurance company. Insurers have a right to do this, and charge as much money as they want to because they have a right to exist for their own benefit. This right is a derivative of the rights to life and the pursuit of happiness which the owners and executives of the company--indeed all employees of the company--all have. 

Insurers earn the premium payments they collect because they've created a financial product and they're offering you, the client, something of value. You voluntarily pay for this value based on your wants and needs. There is no force involved.

In the insurance industry, however, government steps in to regulate (among other things) the rates that insurers charge you, the client. These regulations may cause the insurer to go out of business, charge premiums that are higher than the company would otherwise charge, or forces the insurer to act in other ways which harm you and itself in the long-term. It's not the insurer that is immoral, it's the government, and its associated regulators, that are immoral. Those regulators are preventing the insurer from taking the actions which are required to sustain its own existence.

What are the real-world effects of insurance rate regulation?

Policy Brief Shows Negative Effects Of Government Intervention Into The Insurance Market

I want to share with you a report I've been reading titled Efficiency Consequences of Rate Regulation written by Sharon Tennyson. I want to state from the outset that I do not agree with the final conclusion of Ms. Tennyson in regards to how the problem of rate regulation should be solved, nor do I agree that the intended purpose of rate regulation is good in nature.

However, Ms. Tennyson's research shows that government intervention into the insurance market actually does harm you. She writes:

...overly stringent regulation of insurance rates will lead – over the long run – to a market with fewer firms, lower insurance capacity and larger residual markets than in a competitive environment. Existing firms will also have less capital per dollar of loss covered by insurance contracts, leading to greater solvency risk.

She goes on to say:

Empirical studies show that regulated state markets have fewer firms and a higher proportion of high cost and smaller firms (Joskow, 1973; Tennyson 1987). In several highly regulated automobile and workers compensation insurance markets, a substantial number of insurers exited those markets after years of experiencing low profits. Consistent with the predictions of theory, the firms that exited tended to be large, national firms that write multiple lines of insurance.

 and she also notes that:

States that have reformed insurance regulation to allow insurers more freedom in rate setting have seen increased competition, increased insurance availability, and lower prices.

In theory, government regulation is bad, since it requires the initiation of force. In practice, it leads to higher premiums and fewer insurance companies. The solution? End government regulation of the insurance industry.

This entry was posted on September 17th, 2011 by David. Edits may have been made to keep this entry current. · No Comments · Insurance & Savings, Philosophy In Financial Planning

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