THE ILLINOIS TRADITIONOF COMPETITIVE MARKETS

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THE ILLINOIS TRADITIONOF COMPETITIVE MARKETS
PROFESSIONAL FINANCIAL REGULATION IN INSURANCE

• Philip R. OConnor, Ph.D.
• 2002 Illinois Economic
• Development Conference
• Illinois State University
• December 12-13, 2002
• Phil.OConnor_at_constellation.com
• 312-704-8141

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THE ILLINOIS EXPERIMENT HAS EVOLVED TO BE A MODEL

• Since 1971 Illinois has operated under a highly
  successful model of insurance regulation.
  
• The four key features are
• Full competition in pricing.
• Strong competition in products with a clear set
  of minimum standards of coverage.
  
• Aggressive market conduct examinations and
  consumer complaint management.
  
• Leadership in financial solvency oversight.
• No state has a more vibrant market.

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THE ILLINOIS MODELTHE PENICILLIN SCENARIO

• Illinois 1969-1971 experimental property/
  casualty competitive rate regulation law that
  replaced a prior approval law expired but did not
  automatically restore the old system.
• Illinois had accidentally opted out of the
  exemption of insurance from the Federal
  anti-trust laws granted by McCarran-Ferguson Act
  as far as pricing is concerned.
• No one would have had the courage to consciously
  undertake the Illinois experiment 30 years ago.
  
• The experience was so good that in the early
  1980s Blue-Cross rates and workers compensation
  rates moved to competition.
  

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INSURANCE PRICE COMPETITION IN ILLINOIS

• Each property/casualty, health and life insurance
  company or commonly owned group must make its own
  individual decisions about pricing.
  
• Insurers can use advisory groups to collect loss
  data but bureaus cannot prepare advisory rates.
  
  
• The Insurance Department collects sample pricing
  from companies selling auto and homeowners.
  
• Only regulated rates are for the auto assigned
  risk plan and fire/homeowners from FAIR Plan.
  
• Most insurers will give indicative price quotes
  for auto and homeowners over the phone.
  

5
THE ILLINOIS SYSTEM OF FULL COMEPTITIVE PRICING
HAS WORN WELL

• Thirty years price surveys of state-by-state auto
  and homeowners rates and prices show Illinois
  consistently right in the middle.
  
• Hard market periods of the market and shortages
  in all lines have been brief.
  
• Neither house of the Illinois General Assembly
  has ever passed a rate regulation bill since
  1971.
  
• The Illinois Insurance Department has been a firm
  supporter of competitive pricing because the
  results have been good.
  

6
30 YEARS OF ACADEMIC RESEARCH SUPPORTS PRICE
COMPETITION

• Research by academics and insurance regulators
  almost uniformly find that prior approval rate
  regulation does not produce any benefits beyond
  those of competitive pricing.
• Much of the research supports the contention that
  competitive pricing is more efficient and is more
  likely to produce a more consumer friendly
  environment.

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30 YEARS OF COMPARATIVE RESEARCH FAVORS
COMPETITION

• Prior Approval States
• Are the dozen highest priced for auto insurance
• Have rates no lower on average
• Have higher exit and lower insurer entry rates
• Have larger personal lines residual pools
• Have more volatile auto loss ratios
• Have larger residual cross-subsidies
• Have larger voluntary market cross-subsidies
• Have less accurate prices
• Make price changes political events, not
  economic
  
• Rob regulatory resources from more vital needs

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ILLINOIS AND MANY OTHER STATES STRIKE A GOOD
POLICY FORM BALANCE

• PC policy forms can be used after being filed on
  condition that they can be disapproved at a later
  time if found to be unfair, misleading or
  unlawful.
• Life and Health policy forms must have prior
  approval.
  
• All forms must meet minimum statutory and
  regulatory standards.
  
• Department tends to be more open than closed
  minded on new products offerings and respects
  diversity in products.

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MARKET CONDUCT EXAMS CONSUMER COMPLAINT
MANAGEMENT

• Illinois became a national leader because it
  could devote resources to market conduct exams
  modeled on financial exams.
  
• Market conduct exams focus on patterns and
  practices to better assure broad fairness.
  
• Illinois has relied on information disclosure and
  was an innovator in designing system to handle
  handle consumer complaints.
  
• Annual consumer complaint ratios allow customers
  to compare insurers with one another.

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ILLINOIS HAS BEEN THE LEADER IN FINANCIAL
REGULATION INNOVATION

• Virtually every innovation in the past 30 years
  has started in Illinois
  
• Early warning financial ratio analysis
• CPA audit rule
• Targeted financial exams
• Risk Based Capital reports
• Focus on financial solvency regulation has helped
  to instill a culture of professionalism in the
  Insurance Department.

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ECONOMIC RESULTS OF THE ILLINOIS MODEL

• Personal business consumers can usually find
  needed and desired coverage at prices that
  compare favorably nationally.
  
• Hard markets tend to correct rather quickly.
• Prices convey accurate assessment of risk.
• Illinois is attractive as an insurer home base
  and consequent employment results.
  
• State with the highest percentage share of auto
  and homeowners insurers licensed in the US.
  
• State policymakers have sent a signal that
  politics will not distort economics of the
  insurance market.