[js8]

It's not their job. It would be easy to adopt laws requiring insurance companies to separate insurance pool money (used to pay out insurance) and operational money (used to pay employees and profits), and have these separated when showing the price of insurance. That would reduce the moral hazard of insurance companies paying profit out of the pool.

[s1artibartfast]

It can actually make it worse, and creates different Hazards.

When it does work is when insurance has no influence on the price of goods, and is a minor consumer. For example, when fire insurance pays to replace your goods that burnt up.

When it doesnt work is when insurance is the predominant purchaser of those goods. A good example would be US health insurance, which has an 80/20 rule just like your proposal. Health insurers by law (ACA) must pay out 80%, with 20% allowed for opex and shareholder returns. The Hazard is that as an industry, to increase returns, you want the cost of care as high as possible, thereby maximizing your allowable profit.

It is a similar problem to how power is regulated in California, which has a mandated profit cap as a percent of costs. As a result, these regulated companies have the highest opex and cost of power in the nation of approximately $0.50/kwh

[js8]

What you're talking about is a market failure, basically admitting that markets don't decrease prices in many cases. Which is a much deeper rabbit hole.

My proposal even doesn't say what the ratio should be. If there wasn't legally defined maximal price margin (say 20%), I don't see what it would change in your argument - the companies would be free to ask for even more. Conversely, there is nothing that prevents the companies from lowering the margin as a result of competitive pressure from consumers.

[s1artibartfast]

I don't know if I'd call it a market failure or a regulatory failure, or where the line is defined in the economic literature.

The difference between a cap system and a uncapped system is the incentive to increase the base price as well.

[js8]

There is an incentive for companies to increase prices, regardless of the price cap, aka "profit motive". That we can agree on.

My question is about the incentive to decrease prices (e.g. due to competition). Why it should be affected by the price cap? That's what you need to explain.

[s1artibartfast]

The competivive effect is not damped by price caps. It still exists (or doesnt), in the market place.

You usually see %profit caps as a failed band-aid in markets with poor competition. For example, customers usually dont have a choice in electric company.

There is also really poor competition in health insurance for a number of reasons. Insurance is tied to employment and both options and mobility are limited. Within those options, it is verry difficult to discern differences. I certainly cant tell if a 10% cheaper plan is that way because it is more efficiently run, or if it provides 10% worse coverage.

Last, while firms may compete on total price, they can collaborate to raise the costs for the industry at large. For example, health insurance companies would want to wholesale price of drugs to rise for everyone.

Im not saying that %profit caps are worse than unfettered monopolies (although they might in some cases). My Point is that profit can have huge market distortions, and economically sound solutions would focus on addressing the fundamental issue of poor competition.