How Government is Making Insurance Inaccessible

One of the most important and consequential financial transactions in American life is the purchase of a home, and key to protecting that investment has been the availability of affordable insurance. Now, though, government price caps are undercutting insurers’ ability to offer risk-based rates and that’s making insurance inaccessible for many Americans. 

Take California, where “Prop 103” created an onerous process that requires insurance companies to demonstrate the need for higher rates. It also empowers the state’s insurance commissioner to delay or let premium requests die on the vine. These new restrictions push companies out of the market, reduce competition, and make insurance both less accessible and affordable.

Understanding Risk-Based Pricing in Homeowner's Insurance

Companies write insurance policies so that they will cover expected losses. In other words, they charge a premium that allows them to pay out a policyholder’s claim if an event causes a covered loss. This requires insurance companies to make highly accurate predictions about policyholders’ likelihood of making a covered claim. If there is a high likelihood of an event triggering a policyholder to make a claim, then an insurance company will charge a higher premium (i.e., price).

The U.S. Chamber of Commerce released a report in 2021 that found both consumers and financial firms benefit from this system of risk-based pricing because it provides more consumers with access to credit and insurance at better rates and helps financial firms accurately predict and account for risk.

How Supply and Demand Shape Insurance Premiums

Government-imposed price controls, no matter what form, prevent insurance companies from charging a premium that accounts for risk. Capping the price of insurance does not make it more affordable – it makes it less accessible. Companies can no longer offer policies if they cannot charge premiums that cover expected losses.

In California and elsewhere, we see firsthand how government price controls hurt consumers and undermine insurance market competition. In California, “Prop 103” requires insurance companies to maintain “prior approval” before implementing new rates for property and casualty insurance. In practice, this has meant that insurance companies have not been able to charge higher premiums as risks  have increased because the state insurance Commissioner has denied the increases or de facto denied by simply not approving them. 

Exploring Competition in the Homeowner's Insurance Market

In general, the market for insurance in the U.S. is very competitive. There are 2,651 property and casualty insurers operating in the U.S., according to a recent report from the U.S. Treasury Department.

Another measurement of market competition is the Hirschman-Herfindahl Index (HHI), which measures market concentration by measuring the size of companies relative to the size of the industry they are in and the amount of competitiveness. According to the National Association of Insurance Commissioners, the HHI based on premiums across all property and casualty lines is 297. For comparison purposes, anti-trust enforcers are concerned with industries with higher HHIs, with an HHI over of 2,500 considered highly concentrated.

When insurance companies are subject to rules that prevent them from charging premiums that cover expected losses, they may be forced to leave the market so they can remain solvent. This can hurt market competition.

Policymakers critical of insurance companies leaving California and other markets should consider removing price controls rather than creating new sticks intended to promote “affordability.”

About the authors

Bill Hulse

Hulse oversees the day-to-day efforts of CCMC including policy development, advocacy, and communications.

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