Market, not government, will solve insurance woes

At least some questions were answered when the Legislature’s insurance committees met to investigate the possibilities that a major insurer in Louisiana meant to break the law or to leave the state:

The threat of Allstate leaving was not wholly conjured up by present Insurance Commissioner Jim Donelon as a campaign stunt to may him look like the champion of insurance coverage for Louisianans. Apparently, there’s been talk about it for months, although he may have overemphasized and exaggerated it in a fit of electioneering zeal.

What does the Department of Insurance do with its time? Apparently, not much when it comes to something like this. Donelon’s deputy Chad Brown said this issue of Allstate’s wanting to remove wind and hail coverage from south Louisiana policies that also did not have auto coverage attached was first broached at the beginning of the year, although he maintained it was more hypothetical than anything else until the past couple of months. One would think in those past couple of months, before Donelon corralled the media and went public that much greater progress could have been made in trying to find a solution that did not include Allstate’s exit option.

The committee meetings themselves were not entirely a campaign stunt. The head of the Senate version, state Sen. James David Cain, is opposing Donelon in the fall and having plenty of good media coverage and an opportunity to look like the champion of insurance coverage for Louisianans probably did not discourage him from this between-session endeavor. Frankly, little new information came out of the three-hour exercise, but what small amount there was may have been worth the couple of thousand bucks in legislator per diems and travel expenses coughed up by taxpayers as a result.

Legislators remain weaklings and lack control over their own fates and actions. At least that’s what one may gather from Cain’s House chairman counterpart, state Rep. Karen Carter, who argued against Cain’s call for a special session devoted to insurance matters because “[f]or us to come into a special session for two to three weeks … and get wined and dined without an agenda is not wise.” In other words, she fears that lobbyists would exercise Svengali-like powers over her and other legislators, to the state’s extreme detriment.

At least one member of the committee is a hypocrite when it comes to the impact of large entities’ actions on the people. State Sen. Don Cravins bitterly complained that Allstate’s decision-making in regards to claim financing that as a result “the citizens of Louisiana have to pay for your mistake?” Cravins, resigning his seat at the end of the year, better hope nobody decides to tally up the millions, even billions of dollars Louisianans have had to pay as a result of his and his colleagues’ mistakes made in Louisiana’s spending priorities that they happily authorize year after year.

The question remaining, however, is the big one ostensibly why the meetings were called, whether Louisiana is going to want to keep boxing itself in and creating its own crisis. There are two reasons this “crisis” has happened: (1) the true risk-return ratio for insurance in the state has been underestimated on the risk side and (2) there is an inflexible law on the books, which no other state has, which fundamentally distorts the ratio by forcing insurers to offer coverage without an easy exit option for removing that kind of coverage while being able to write other kids of policies in the state.

Casting aside more dramatic and long-term scenarios, the state should, and can right now, do this: invite Allstate to jack up its rates as high as it would like to cover the risk its sees added that is making it want to drop wind and hail coverage. As part of its job, the Insurance Rating Commission will make sure the request represents a reasonable predicted profit level and that it doesn’t engage in collusion with other companies (who also may be invited to raise rates) to create the opposite problem, artificially high rates. If so, then competition will keep a lid on rates.

The lid, however, will be higher, perhaps significantly, than in the past. That’s good. This will have the effect of increasing rates paid by the state insurer, Louisiana Citizens Property Insurance Corporation (it must price its insurance at least 10 percent higher than a basket of the rates of the largest private insurers) which will mean its policyholders will pay for more of their own claims and state ratepayers and taxpayers will have to pay less (because Citizens must pass on excess costs either to private insurer policyholders or to taxpayers to pay interest on bonds sold to cover costs of claims). That’s only fair, and will shore up Citizens much faster than anticipated.

Some people will whine about this as a result, about how they now can’t afford to insure or buy a certain property. That’s unfortunate to them, but entirely fair because they should expect to pay for the preponderance of the costs of their insurance and not try to shift the burden to those who choose to live in less-risky areas, or who don’t have to pay for any insurance.

The thing not to do is what Allstate proposes, subsidize their business by creating a state-run risk pool where taxpayers would bail out insurers who do make mistakes. Instead, let the insurer try to make up for the mistake by raising rates – which of course will cause it some harm by losing business to smarter, lower-cost providers, but that’s what it deserves for making poor decisions, instead of forcing the consequences on taxpayers.

You don’t need special sessions, or summits, or anything fancy to address the insurance “crisis” described here, which is neither an emergency nor difficult to manage, if Louisiana (rather against its historical populism) lets the free market (as best it can in a regulated industry) reign. Most public policies’ optimal solutions come from government getting out of the way as much as it should, and this certainly is one such instance.