[trogdor]

Why are insurance rates regulated by the government?

I understand that the state has a strong interest in ensuring that insurance companies are adequately capitalized, but I don’t understand the state interest in directly regulating premium prices. (Or is that not what you are referring to?)

[gumby]

For the same reason credit card interest rates are regulated: there's an asymmetry in bargaining power.

Car prices are not regulated because there are plenty of options for the consumer.

[AnthonyMouse]

If there is such an asymmetry in bargaining power then why do most people pay less than the statutory maximum? If there are multiple insurance companies, how is it not the consumer who has the bargaining power, since they can just take the lowest price?

The actual reason is that some consumers are extremely high risk, the market rate for those consumers is correspondingly extreme, and then they whine to legislators that they're getting ripped off when in fact the rate reflects the risk. And then the company either refuses their business if they're allowed to or raises rates on everybody else to compensate if they're not.

[lazide]

Eh, or without regulation when people switch risk categories due to a loss they get completely screwed because no company will insure them anymore. At which point, there is strong incentive to only claim the most outrageously bad losses, and for people to only actually get insurance if they have real reason to suspect a loss that is non obvious to others.

It’s a market type that is fundamentally messy and prone to abusive behavior by both sides.

[AnthonyMouse]

> Eh, or without regulation when people switch risk categories due to a loss they get completely screwed because no company will insure them anymore.

This only happens when regulations cap premiums, because otherwise there is always a rate at which selling insurance is profitable. Even if you have a 50% risk of a claim (extremely high), you'd still be able to buy $100,000 in insurance for a little over $50,000. Of course, you may not be able to afford this, but then maybe if your risk is that high you should just refrain from engaging in that activity eh?

> At which point, there is strong incentive to only claim the most outrageously bad losses

That's what insurance is for. If you have a 20% chance of losing $100 every year, you don't need to pay $21/year for an insurance policy, you just lose $100 once every five years.

> and for people to only actually get insurance if they have real reason to suspect a loss that is non obvious to others.

The reason to get insurance is if there is a low probability high cost risk, like a house fire. You don't expect it to happen, but it could, and you'd rather pay $1000/year, have it and not need it, than lose the value of your house in the event of a random accident.

[lazide]

Hard to ‘refrain’ from buying health insurance in the middle of cancer treatment eh?

Or ‘refrain’ from buying house insurance because someone tripped in your house and is suing you for $1M worth of damages, or you discovered your house was built in a high risk fire zone.

Or ‘refrain’ from buying vehicle insurance after an accident because the state will not let you drive without valid insurance.

That’s the whole point.

Because for normal humans, there is no difference between ‘insurance won’t be issued’ and premiums shooting up from $100/mo to $90k/mo. especially when the policy renewal period is in the middle of whatever is going on. Like trying to live. And if insurance companies didn’t have caps on premiums, that’s what they’d do - or just cancel it to avoid even worse PR.

At least ‘pre existing conditions’ aren’t automatically a death sentence when trying to switch insurance anymore eh?

[AnthonyMouse]

> Hard to ‘refrain’ from buying health insurance in the middle of cancer treatment eh?

The thing you're insuring against in this case is a cancer diagnosis. If you're insured when that happens, the insurance company should now be on the hook for your lifetime worth of cancer treatment regardless of whether you pay them any more premiums. That isn't how we implement it, the existing regulations don't work like that, but that's how it would work if what you were buying was actually insurance. The insurer eats the cost at the point when the unknown risk becomes known.

> Or ‘refrain’ from buying house insurance because someone tripped in your house and is suing you for $1M worth of damages

You don't have to buy liability insurance if you own your house. Of course, then if your negligence injures someone they're going to get the house instead of the insurance company's money, but that's up to you. And can be avoided in either event by not giving people valid legal claims against you.

Notice that a single claim is generally not enough to make insurance unaffordable, and multiple large valid claims is generally a sign that you're doing something wrong.

> or you discovered your house was built in a high risk fire zone.

It's not the insurance company's fault that you bought a house without checking what it would cost to insure. The cost of insuring houses there is supposed to be high, to deter people from building them there.

> Or ‘refrain’ from buying vehicle insurance after an accident because the state will not let you drive without valid insurance.

So you take the bus or move to a walkable neighborhood. What's your alternative, that someone can total two new cars every week and still get insurance for the same rates as anyone else?

> Because for normal humans, there is no difference between ‘insurance won’t be issued’ and premiums shooting up from $100/mo to $90k/mo.

But why should an insurance company be required to insure you at all? "Known arsonists can't get/afford fire insurance" is fine. "People who get into a major car accident every week can't get/afford car insurance" is fine.

> especially when the policy renewal period is in the middle of whatever is going on.

That's not how insurance works. You buy insurance, then something happens, then you file a claim. They can't retroactively raise your premiums, they can only raise the future ones because there is now evidence that your risk is higher, and then you get to decide if continuing to carry insurance is worth it, and you still get the money from the claim that happened while you were insured. Then you can either choose to pay the higher rates, go uninsured going forward or stop doing the thing you need insurance coverage for.

> At least ‘pre existing conditions’ aren’t automatically a death sentence when trying to switch insurance anymore eh?

This has a similar effect to putting the full lifetime cost on the insurance company you had when you got diagnosed, except that you can then change insurance companies. Which is weird and has perverse incentives, like there is no reason to carry good insurance against long-term cancer treatment until after you find out you have cancer. Which makes the good insurance much more expensive because buyers would self-select and only people who know they have cancer would buy it.

Then we try to avoid that by tying health insurance to employment which makes it harder for people to switch when they get a diagnosis, and that in turn has a ton of other negative effects because now there is much less competitive pressure in the health insurance market.

Regulators seem to really suck at thinking through the consequences of what they're doing. Or they don't and someone is getting paid to do it this way on purpose.

[brewdad]

More than that, you can choose to go without a credit card. Insurance is mandatory for most people. Either the law requires it or a lender requires it in order to approve the loan.

Insurance rates are regulated for the same reason most states regulate utility rates. You can’t really opt out and the markets where price regulations have been removed have left most consumers worse off.

[jajko]

Not a good comparison - you can also choose to go without buying a house, its a very US thing to measure success in life with such (massively incorrect) yardstick.

[TylerE]

That’s not really true anymore. Try booking a hotel or a flight without a cc.

[dan-robertson]

I thought there were also requirements that insurance rates are profitable (in expected value) to prevent some loss-making customer acquisition strategies and to reduce some long-term risks from insurers going bust. I’m not very confident in this claim.

[brogrammernot]

Yes but less so on the rates themselves & rather do you have enough cash to stay alive without going under.

They’re obviously related but less regulatory focus on rates, more on cost of business and that.

Edit: Basically you can run at a loss (most do) for a limited period of time but have to show that you will be liquid on the other side of the losses.

[DSMan195276]

Every state requires you to hold some minimum level of car insurance, mortgages require a level of homeowners insurance, etc. The underlying problem is that it's a significant barrier for people if they get priced out of the market (even if it's for good reason). If you can't afford car insurance or no insurers will offer it to you then you legally cannot drive a car, and in the US that becomes a problem that spirals into bigger problems.

I would say overall there's no good answer to this problem that everybody would be happy with, just maybe one you consider "less bad" than the other ones.

[sokoloff]

While there’s a lot I dislike about the Mass auto insurance rules, the rules for “no insurance company will voluntarily insure you” are pretty friendly to drivers who are otherwise uninsurable.

https://www.mass.gov/info-details/massachusetts-auto-insuran...

[wbl]

If you are such a risk when driving no insurer will touch you, I would like you off the road.

[bobthepanda]

In practice what actually happens is that these people will drive anyways and cause damage before being pulled over, except now they have no insurance and it’s a whole mess.

It is also the theory behind universal healthcare coverage, because people will have medical issues that eventually end them in the ER regardless of coverage status and someone has to get paid for services rendered. And also insurers will literally take any excuse to deny coverage if they can.

[earthling8118]

I'd prefer that nearly all of us were off the road, but in practice we've not built a world that allows such a lifestyle.

[neilv]

Why is basic insurance for ordinary people a for-profit business at all, rather than something the collective (administered by the state) does to soften any misfortune that hits any of its members?

[AnthonyMouse]

Because state insurance programs have perverse incentives. Insurance itself is a moral hazard. You buy insurance and then do something risky you wouldn't otherwise have done because if it goes wrong you're insured. It's also an opportunity for outright fraud. If the book value of your property is higher than its true value, you carry insurance and then set a fire.

Private insurers have the incentive to price this in. If they can predict you're going to be high risk, or uncover evidence of arson, they can charge you higher rates or refuse coverage. For state insurers the cost goes on the taxpayer and if claims are refused for legitimate reasons, the perpetrators go to the media and accuse the state of bankrupting their family. This puts pressure on elected officials to shift the burden of this fraud onto the taxpayer, whereas private insurers would push back because they have a direct financial incentive not to eat the cost of fraud and mispriced risk.

[Kon-Peki]

> Why is basic insurance for ordinary people a for-profit business at all, rather than something the collective...

There are mutual insurance companies [1], including the largest insurance company in the US (State Farm). At the end of every year, if the amount of money left over exceeds the formula they have set, every policyholder gets a refund.

[1] https://en.wikipedia.org/wiki/Mutual_insurance

[toast0]

> At the end of every year, if the amount of money left over exceeds the formula they have set, every policyholder gets a refund.

That's commonly a requirement of regulation too. I've had refunds from car insurance and healthcare insurance because claims were lower than expected.

[tomp]

Mathematically, if you sell insurance at break even, you're guaranteed to go bankrupt - on an infinite time scale, the "spike" of a random walk martingale (this last word means, it doesn't make a profit) will exceed every level, i.e. it will wipe out any amount of collateral / capital / equity the company might have.

https://en.wikipedia.org/wiki/Law_of_the_iterated_logarithm

[cortesoft]

This is why you have re-insurance

https://en.wikipedia.org/wiki/Reinsurance

If the final insurer is the government, you don't have the risk of ruin because you have control of the money printer.

[MajimasEyepatch]

Reinsurance isn’t magic. This helps with one-off losses, but if you’re fundamentally not able to make a profit, they’re not going to cover you, because all you’ve done is shift the negative expected value to them.

[TylerE]

It also probably increases the odds of total ruin... think a Katrina or an Andrew but a bit worse. On a smaller scale, it's never gonna be just one car in a town with hail damage.

[TylerE]

It also probably increases

[TylerE]

If money printer goes brr… you’re losing, not winning.

[bdjsiqoocwk]

What a bunch of nonsense.

If you believe that in an infinite time scale the spike of a "random walk martingale" will exceed every level, then you also believe that you'll go bankrupt even if you don't sell insurance at break even. Maybe mathematically incorrect, but entirely irrelevant in the real world.

IN ADDITION, the money that insurers make isn't just the underwriting profit but also the investment profit. You you're talking twice as much shit as the average HN commenter.

[tomp]

I don’t ”believe” in math, I can prove it.

If you don’t sell at break even, it’s not a martingale, so the Law doesn’t apply.

[bdjsiqoocwk]

You can prove mathematical propositions, you obviously can't make truthful conclusions about insurance. And that's really the crucial parts. Anyone can make prove mathematical statements.

Reminds of the guy who lost his keys in the darkness and was looking for the keys under the lamp because that's where he can see. Likewise, you're using your tools and hoping that the tools have some connection to real life.

You sound like one of those "that's all good in practice but it would never work in theory" type of people.

[tomp]

The real world is much more complicated that mathematical models.

But if your business goes bankrupt with probability 100% with even a simplified mathematical model, I wouldn't want to invest in it.

[NeoTar]

In some places and markets it is – I believe if you live in British Columbia basic vehicle insurance is done through the province.

https://en.wikipedia.org/wiki/Insurance_Corporation_of_Briti...

[username332211]

If you do that, you must also regulate the sort of vehicles ordinary people can buy and the sort of homes they can own.

After all, we can't have the community suffer an unsustainable loss because some guy earned too much money and selfishly bought a Camaro.

So, obviously the collective should create a list of cheap and economical cars ordinary people are allowed to buy.

If that doesn't feel right to you, remember, the so called "freedom of choice" is a bourgeois value. Transcend it.

[zen928]

> you must also regulate the sort of vehicles ordinary people can buy and the sort of homes they can own.

Yep, we already do that. Vehicles and houses have to conform to a set of standards that provide security and safety measures for others, e.g. "Street legal" car restrictions, fire hazard safety requirements and building permit regulations and state codes that adhere to city guidelines, etc. Might need to include a few more talking points from the political pundit you're regurgitating views from for a better argument.

[nucleardog]

> If you do that, you must also regulate the sort of vehicles ordinary people can buy and the sort of homes they can own.

There are two provinces in Canada (British Columbia and Saskatchewan, since 1973 and 1945 respectively) who have a crown insurance corporation and require everyone purchase insurance through the government.

Neither of them force everyone to drive a Lada.

[cortesoft]

Even if the government ran the insurance program, you wouldn't be forced to charge everyone the same amount for their insurance. The Camaro driver could pay more for their coverage.

[nichohel]

Also, fraud.

[devoutsalsa]

“When it comes to rate regulations for overall insurance, according to state regulations they should not be excessive in any way. This means that they must be affordable, and are not set too high in relation to insurance claims. Insurance rates should also not be inadequate. This means that they should not be marketed at a rate that is too low. The Insurance rates should also not be discriminatory in any nature, meaning that all insureds are charged similarly for similar coverages. These rate regulations are imposed on insurance companies in order to protect consumers. (Dorfman and Cather)”

Source: https://www.lawteacher.net/free-law-essays/judicial-law/gove...

[username332211]

There are votes in it.

Or, to be precise, the benefits are concrete go to precise groups of people, the costs are abstract and diffuse. Same thing as protective tariffs.

[_tom_]

Votes are the sort term answer. People are losing their houses in Florida. Mortgages require insurance, and if you insurance goes up thousand a year, and hundreds a month, some people can't afford it, and lose their houses.

Longer term, this is bad for a society in general, and politicians do know this.

There are all sorts of potential societal consequences to people losing homes that cost the society (us!) money (homelessness, vandalism, entire neighborhoods going the way of Detroit suburbs, and much, much more). Society doesn't want this to happen.

[brogrammernot]

Premiums is what I’m referencing, yeah.

So, it’s a complex thing but the state has a vested interest in drivers being insured because of state / federal funding for roads, infrastructure and all of that.

The original intent was to stop humans from being greedy assholes and to provide a stick for when they messed up. Without the states involvement, insurance would likely go the way of used auto with “buy here pay here” lots which is a net negative for the state & society as a whole.

They want to make sure that “fair” prices are set so that there isn’t an overly disproportionate amount of people who need the insurance not having insurance. In reality, the less risky drivers do for all intents and purposes help off-set the cost of the more risky people but all of that is hidden in the premium logic.

At the end of the day, what has happened though is the state’s regulatory group overstepping their bounds (in my opinion) and ignoring good faith proposals with data showing why rate increases are needed which leads to situations we’re in now.

Having been in that world (I left it) I can honestly say there has to be some regulations or regulatory body because a lot of these folks spend so much time looking at numbers (actuarial science in general) they forget the fact there are humans behind those numbers.

[bdjsiqoocwk]

> Why are insurance rates regulated by the government?

Why wouldn't they be?

The only reason why you might believe they shouldn't be is if you fell for the "free market knows all" nonsense.

[everybodyknows]

> state interest in directly regulating premium prices

The state interest stems from the political interests of elected officials. See comment above by @broprogrammernot.

[vundercind]

Ten-to-one you can go back to when the regulation started and find there was rampant, blatant abuse going on. That’s the usual story behind these kinds of things.

[jfengel]

There is a saying that regulations are written in blood.

They may not have been well designed, or they may not wear well. But most of the time they are put in place because somebody got badly hurt, one way or another.

Industry could usually design itself better regulation. But unless it finds a way to mutually enforce compliance, the task will fall to government.