In defiance of history, states consider insurance price controls
“There is nothing new under the sun,” according to the book of Ecclesiastes, and that’s especially true for bad public policy. Legislators love recycling old, failed laws and presenting them as innovative, forward-looking initiatives. We are in the midst of one of those vicious cycles, or to quote Yogi Berra, “It’s like déjà vu all over again.”
“America is in a cost crisis when it comes to home and auto insurance,” the Wall Street Journal recently noted. “A number of states have a controversial answer: price controls.” While insurance rates have been increasing, limiting insurers’ ability to turn a profit by implementing price controls is clearly a terrible—albeit not a new—idea.
“Illinois lawmakers are considering a ban on home insurers hiking rates because of catastrophes in other states,” the Journal continued. “Louisiana recently handed its regulator the power to strike down ‘excessive’ premiums […] In Michigan, Democratic lawmakers this summer proposed a law to impose a 10% cut in auto-insurance rates.” Even in Georgia, a lawmaker not long ago proposed limiting insurance rate increases to no more than the inflation rate.
Since legislative session concluded, a Georgia House of Representatives study committee has been investigating market-based solutions to make insurance more affordable. Its chairman, Rep. Matt Reeves, R-Duluth, tells me, the committee “has held over 7 hours of hearings with dozens of informative speakers […] and price controls have not been requested.” That is wonderful to hear. Even so, it’s important to expose the folly of price controls. Any student of history knows how these policies end.
Long before state lawmakers tinkered with the idea of insurance price controls, ancient Rome experimented with a similar kind of regulation: curtailing interest rates on loans. In 342 B.C., Lucius Genucius passed a measure forbidding lenders from recouping any interest. This was an abject failure. Ancient bankers saw only risk and no upside to lending, and the Romans simply ignored the law. Otherwise the credit system would have permanently cratered.
With the rise of the Soviet Union a couple of thousand years later, communists decided to centrally plan their economy and establish price controls. This effectively prevented inflation, but caused regular, widespread shortages of basic staples, which were simultaneously widely available and cheap in our market economy.
Years later, California decided to apply the same principles to their insurance industry. Through Proposition 103, the state instituted regulations that made it virtually impossible for insurers to set rates based on actual risk, and thus insurance companies hemorrhaged cash and began to flee the state. California has since taken a less heavy-handed approach.
The lesson here is clear: Private enterprise and free markets are much better-positioned than governments to determine what goods and services should cost. Companies in competitive markets set prices to survive. Meanwhile, government officials who implement price controls have an incentive to artificially keep prices below market average. The cheaper, the more popular for most consumers at first, but this destroys businesses and creates scarcity in the process.
None of this makes consumers happier about paying increased rates, but it is important to know how insurance rates are set. In a healthy regulatory market, property and casualty insurance rates are largely based on the likelihood of consumers making claims, the size of the prospective claims and to recoup losses from catastrophes, which have played an outsized role in Georgia.
In 2023 and 2024, hurricanes Idalia, Helene and Milton slammed into the Peach State—leading to massive losses. In 2024, Georgia homeowners insurers paid out $1.42 for every $1 they earned through premiums. Business, regulatory and legal costs are also baked into insurance rates, and understandably. After all, a business that cannot turn a profit does not stay in business, and if insurers leave the state, then Georgians have no options for insurance.
Georgia lawmakers recently tackled the rampant lawsuit abuse that plagued insurers. It may be far too early to tell how successful it will be at curbing skyrocketing rates, but the initial results seem promising. “I expect reasonably [to see a] 3 to 5% decrease in rates in Georgia this year,” Insurance and Safety Fire Commissioner John King said.
“State Farm, one of Georgia’s largest insurers, has reduced its rates this year. Changes like that in the market, and a continued excellent small business climate […] have all the right ingredients to deliver savings to insurance customers in Georgia,” Rep. Reeves told me. These are clear examples that there are methods to help insurance customers without resorting to business-killing price controls.
Even though ancient Rome, the Soviet Union and California learned firsthand of the dangers of price controls, the urge to revisit this policy seems irresistible to many officials. Instead of recycling yesterday’s failures, Georgia policymakers should focus on innovative approaches to foster a thriving free market and competition.