By Dan Kennedy • The press, politics, technology, culture and other passions

Deregulatory blues

I’m almost 51 years old. I don’t smoke. My weight’s OK, although it could be better. I run, badly. I’ll give myself a B or a B-plus in the personal-health department. So why should I have to pay higher medical-insurance rates to cover people too lazy to get off their rear ends or too undisciplined to quit smoking?

Because the whole point of insurance is to spread the risk so that those who need less will help pay for those who need more. Which is why I predict that Gov. Deval Patrick’s experiment in auto-insurance competition will end badly, just as it did 30 years ago when Michael Dukakis tried it.

The Outraged Liberal says he’s “tired of subsidizing bad drivers.” Well, he’s going to develop chronic fatigue syndrome once he has to start subsidizing bad drivers who are now unemployed because they can’t afford auto insurance and can no longer get to work.

The ideal insurance system would reward good drivers while at the same time not penalizing the bad ones so excessively that they’re forced off the roads — or forced to drive without insurance as a matter of economic survival. Guess what? The system we have today looks an awful lot like that ideal.

A Globe editorial today puts it well:

In Massachusetts, about 80 percent of drivers pay a little more so that 20 percent of drivers can pay a lot less. That subsidy is a significant reason that Massachusetts has the second-lowest rate of uninsured motorists in the nation. It would be a shame, and a potentially costly one for all insured motorists, to see that rate rise.

I’ll admit that I’ve got two self-interested reasons for wanting to keep things the way they are. First, I’m not such a great driver, although I’m better than I used to be — the last surcharge, for a speeding ticket I incurred in New Hampshire six years ago, is scheduled to come off my insurance in August. Second, I’ve got two kids, and insurance for teenage drivers — already excessive — will likely go through the roof when this “reform” takes hold.

I realize that Massachusetts is the only state that regulates auto insurance so tightly. But rates are affordable, and they’ve been going down. Deregulation is a non-solution in search of a problem.

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  1. Rick in Duxbury

    Exactly how are we in MA so different from every other state? Density? Demographics? Weather? Those looking for another excuse for income redistribution have seized on car insurance, of all things. We have proven over the last few decades that involving the MA Legislature in matters such as this results in the production of demagogues but not more insurance, affordable housing, etc. Saying that subsidizing the uninsured motorist coverage is necessary to avoid carnage on the roads is the same logic that said granting home mortgages to unqualified borrowers would somehow advance community cohesion. How has that one been working out for you? Despite what some people yearn for, we live in a capitalistic country. State programs for Worker’s Comp, auto insurance and other products have been dismal failures nationwide, while using taxpayer resources to accomplish what cheap capital in the system could do for less. Why do you think that equities, (e.g.,stocks, office buildings) are selling for insanely-high multiples of earnings? Too much money in the system. “Robbing Peter to pay Paul” usually gets the support of Paul. I wonder how many of those who fear competition have recently shopped at a WalMart?

  2. Dan Kennedy

    Rick: Would you propose making auto insurance optional? If you believe it should be mandatory (and it would remain mandatory under Patrick’s so-called reform), then you’re not talking about capitalism — you’re talking about socialism. Give me good socialism, please, and not bad socialism in the guise of fake “competition.”

  3. man who sold his car and takes the T

    Here’s a simple way of looking at this:SINCE auto insurers want state control of rates to end.AND SINCE auto insurers are for-profit entities looking to maximize their profits.THEN logically you should expect that everyone will ultimately pay more under deregulation.Haven’t we learned from the disasters that were deregulation of electrical utilities and the like? These companies don’t push for deregulation to save you money…they push for it to CHARGE YOU MORE!Repeat after me: it’s not a free market solution when you’re required to make the purchase. Walmart “works” because I can always choose not to buy the goods at all, and Walmart knows that. So they not only have to convince me to buy from them, they have to convince me to buy in the first place…which is much harder to do, and thus helps drive down prices.Here’s a GREAT example: parking garages. If I drive into Kendall Square to work, I essentially have to park at a garage; there’s comparatively very few metered spaces around Kendall. The parking garages around here all know this, and they exploit the hell out of it. While they don’t quite “collude” to set prices, and their rates all vary slightly, you’ll quickly find that if you park for an eight-hour workday, you WILL pay $18 no matter which garage you go to.That’s not competition, it’s a racket and everyone knows it. In theory you can choose not to drive, but that’s not a choice everyone can realistically make. Just like auto insurance.

  4. Anonymous

    “the whole point of insurance is to spread the risk so that those who need less will help pay for those who need more.”Really? Gee, I thought the whole point of insurance was to provide “coverage by a contract binding a party to indemnify another against specified loss in return for premiums paid” [with thanks to the American Heritage College Dictionary]. Dan: There’s no divine right to insurance, auto or otherwise. Since you’re a liberal, I’m sure you think there is/should be, but there’s not. The market should determine how much you pay. If you live in a high theft area, have frequent fender-benders and get cited by the cops for crappy driving, you should pay more than the guy [me] who lives in the suburbs, hasn’t gotten in an accident in more than a decade and haven’t got ticketed in 8 or 9 years.

  5. Dan Kennedy

    Anon 12:40: If you are obligated to buy insurance, which you are, then insurance companies are obligated to sell it to you. Otherwise, insurance companies would be taking on the power to decide who can and cannot drive, which is clearly a government function. You ideologues need to stop trying to impose your free-market rhetoric onto situations where there is no free market. “Man Who,” above, explains it very well. Study it — there will be a quiz.

  6. hafidha sofia

    Thank you for pointing out what many people don’t even seem to recognize: the government REQUIRES auto insurance. If the government is going to require something (and, in some cases, put you in jail because you couldn’t afford it to keep it and get busted), then they should make it available to Americans at the lowest possible rate. Instead, the insurance companies set the market, charge whatever the hell they want – and we all know the cost has to be higher than the value we’re receiving, because they’re turning a profit.

  7. Mike from Norwell

    You know, I kind of like businesses to turn profits; that means that they can continue to operate. Companies that lose money tend to not exist after awhile.The only eye opening thing in the whole auto insurance discussion is the fact that we are the only state in the nation that sets the auto rates. What we have right now is a few well connected local insurance companies w/ the proverbial bags o’ cash to spread around to keep the status quo going.I know that Boston is the hub of the universe and all that, but doesn’t that at least make you wonder if we’re really that smarter than everyone else?

  8. Rich

    Because the whole point of insurance is to spread the risk so that those who need less will help pay for those who need more.That’s only true in the minds of economically-ignorant liberals.The point of insurance is to replace a $N loss having probability P with a certain loss of $N times P. In other words, if you have a 0.0001 chance of a $1,000,000 loss in the next year, your premium should be $100. That’s insurance. In other words, your premium is the expected value (that’s a math term — look it up) of your loss.Now say there are two groups of people. One group has a 0.0003 chance of a $1,000,000 loss in the next year and the other group has a 0.0001 chance of a $1,000,000 loss in the next year. The actuarily-honest premium for the first group is $300 per person and the actuarily-honest premium for the second group is $100 per person. Each person in each group bears the proper cost for covering their risk, since each person is paying the expected value of their loss.What you claim to be “insurance” is real insurance plus a having-nothing-to-do-with-insurance cross-subsidy. If you want to argue that the cross-subsidy is a good thing, go for it, but don’t try to dress up the cross-subsidy by fraudulently calling it insurance.

  9. Rick in Duxbury

    Dan,Exactly how was my original statement wrong? Mike and 12:40 above had it right. I feel bad that someone is a high risk due to age, place of domicile or driving record but how is that my problem? Insurance is enabled through private capital, which funds reserves for future claims and administration. If insurance companies are forced to lose money then the only source of coverage will be via PUBLIC capital. Disregarding whether we have better things to do with public money, when has the government been more efficient at such things? I’m still waiting for a reason why the same economic laws that apply in NY, NJ, CT, etc. are inoperative here. If Arthur Remillard and his Commerce Ins. Co. were in any other state, lobbyists and pols would lose a lot of money they now get as “incentives” for the status quo. If people who think they can do a better job want to start a “co-op” of some sort, (basically the mutual insurers that pay dividends), go for it. The really sad aspect of this is the level of economic illiteracy by the buying public. If you were buying a big screen TV for 2 grand, you’d shop around like mad. Ask someone to spend the same time on insurance and their eyes glaze over. As someone once observed, “Life is hard but it’s even tougher when you’re stupid”.

  10. Dan Kennedy

    And the government is now mandating that I buy a wide-screen TV? How did I miss that?

  11. Anonymous

    DK,Perhaps the mandate was given during an economics class.

  12. Peter Porcupine

    Dan – In a nutshell, here’s why Deval’s plan will never see the light of day. And a have a license that lets me say so (P&C).Since the beginning of auto insurance reform, the rural areas have overpaid to subsidize the urban areas. Last time I checked, Brewster paid 1.27% of the rate it would actually pay based on accidents in its territory – Chelsea paid o.87%. Guesss where there are more cars? And it’s a myth that suburban drivers venturing onto the expressway are what drives up accident rates in the city – your loss follows you home. So the Brewster resident who has the accident in Porter Square goes on the Brewster rate. The Chelsea resident who has an accident on Route 6A goes on the Chelsea territory rate. Statistically, it’s urban drivers hitting urban drivers.So. When Duke tried dereg, rates went to the appropriate level – meaning Chelsea soared and Brewster plummmeted. Well! We can’t have THAT!Some suggestions – why are surcharges capped at 35 points? If you keep having accidents, and a judge can’t be bothered to take away your license – heck, make you pay more! Likewise – the 25% deduction for senor citizens is regardless of driving record. So, a senior with 2 DUI surcharges will pay the same as a high school valedictorian with a perfect record. I mean, don’t you think somebody with two vechicular homicide convictions SHOULDN’T get a 25% discount? But when Monica Mullally (killed someone at 22, lost licensce for 10 years, killed somebody else at 37, lost license again, will get back in a few years) turns 65 – SHE will get a 25% discount!There’s a LOT rotten in Denmark – I just don’t think the Legislature will ever allow true deregulation to happen, as it will cost urban constituents too much – and other economic theorizing is groundless.

  13. Rick in Duxbury

    Peter,Check those decimal points. We had better hope that Deval gets some kind of competitive rating. Who has a better shot at standing up to the pols representing urban drivers wanting something for nothing? If he fails, we can look forward to Sen. Wilkerson demagoguing this one ad infinitum. Imagine her finances WITHOUT lobbyists. (Got me one of them there P&C tickets also.)

  14. mike_b1

    The government doesn’t have to require all auto insurance. The gov’t doesn’t require a homeowner to carry insurance, either, but the lenders do. So let the lender mandate and enforce auto insurance. And if you’ve paid off your car, then you can just carry medical insurance in the event you cause damage to someone else. Or let residents register their cars in any state that will have them.What I’d like to know is, if the subsidy is “a significant reason that Massachusetts has the second-lowest rate of uninsured motorists,” does the state that’s lowest have a subsidy too? If not, then doesn’t that mean Mass. is doing something wrong?

  15. Bruce

    Because the whole point of insurance is to spread the risk so that those who need less will help pay for those who need more.Wow.I gotta get a new dictionary, I guess.

  16. Aaron Read

    The only eye opening thing in the whole auto insurance discussion is the fact that we are the only state in the nation that sets the auto rates. Mike from Norwell, I point out a commonly overlooked problem with this statement in my own blog.

  17. Peter Porcupine

    Rick – the decimals are correct – Brewster pays over 100% of its true loss rate to subsidize chelsea whoch pays a little over 4/5 of its true rate.P&C stands for Property and Casualty. As in insurance broker.

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