Here is why Illinois should rethink the proposed automobile insurance bill.

An automobile insurance bill recently introduced to the Illinois House is replete with proposals that threaten to upend the state’s auto insurance market. Five problematic key elements of House Bill 2203 include:

1. Requiring insurers to obtain prior approval of insurance rates 
2. Restricting insurers’ ability to use relevant data to calculate risk-adjusted rates
3. Opening the door to “intervenors,” meaning that any person can challenge insurance rates by getting involved in Insurance Department rate proceedings
4. Assessing all Illinois insurers 0.05 percent of their premium annually to implement HB2203
5. Requiring all insurers to demonstrate their ratemaking algorithms or models do not disparately impact any customer based on race, color, national or ethnic origin, religion, sex, sexual orientation, disability, gender identity or gender expression

Should HB2203 become law, the inevitable consequences of the bill’s five bad provisions will be the exodus of insurers from Illinois and higher insurance premiums for Illinois consumers, for the following five reasons. 

Government Price Control

Granting regulators the power to prevent insurers from calculating appropriate rates is a form of government price control. The classic argument defending government price controls on public goods is that providers of essential services, such as water and electricity, are either monopolies or few in number. This public good argument does not hold for insurance because there are close to 2,700 insurers in the United States, and over 200 in the Illinois automobile insurance market. As with other forms of government price controls, giving regulators the power to set prices is a tax on future supply, as providers withdraw from over-regulated markets and deploy capital elsewhere.

Data Use Restriction

Insurers are in the data management business. They use data bearing on risk to estimate future loss probability. To the extent insurers have more data characterizing customers, powering their rating models and multivariate tools, rates are invested with greater predictive validity. If data use is restricted, as HB2203 proposes, insurers will be hamstrung and less able to price policies reliably. 

Intervener Process

The “intervener” process, allowed uniquely in California as a result of the disastrous 1988 Proposition 103 ballot measure, has not lowered premiums for consumers, but has instead enriched the citizen activist groups who created it.

Added Cost

An assessment from Illinois insurers of 0.05 percent of their total premium of $27 billion annually would amount to $14 million. If the assessment is for private passenger automobile insurance only, it would cost insurers, and ultimately policyholders, an additional $3.5 million.

Unnecessary Demonstration of Discrimination

The bill’s requirement for insurers to demonstrate their rating algorithms do not discriminate is a stalking horse. Illinois statute already prohibits insurers from discriminating. What’s more, insurance actuaries who calculate rates are bound professionally by the rule that rates they calculate shall not be excessive, inadequate or unfairly discriminatory. With insurers already held legally and professionally to this standard, requiring insurers to prove they do not discriminate is tantamount to suspects considered guilty until proven innocent.

Illinois insurers operate in a competitive market, with 224 in-state private passenger automobile insurers. If insurers discriminate and overcharge customers on the basis of race or another protected category, competitors would swiftly snap up the business with margin-positive lower rates. Discrimination is, simply put, bad business.

California shouldn’t be in Illinois

State-based insurance regulators have two main responsibilities: to protect policyholders and to protect solvency of insurers operating in their jurisdiction. HB2203 would constitute a violation of both regulators’ roles. Policyholders would be harmed because the creation in Illinois of an insurance market like California’s, where major insurers are pulling up stakes, would lead to less choice for insurance buyers. Reduced choice would pave the way to higher prices. Insurers would also be hurt, feeling pain in their financials until they abandon the state and seek greener pastures elsewhere. The unseen hand of competition is a better regulator than the heavy hand of government and Illinois policyholders should not pay higher prices to experience a lesson other states have already learned.