Squaring the Boston Globe Chimes in on Massachusetts Auto Insurance

A reader pointed me to an article at Squaring the Globe, rebutting an article in the Boston Globe, which I commented on a few days ago.

Harry at Squaring the Globe writes:

From an economic perspective there are 2 fundamental facts concerning the present sorry condition of Massachusetts auto insurance:

1. Insurance rates are set by state government, and the rate structure in place effectively subsidizes auto insurance for urban car owners. Suburban and rural car owners pay these subsidies through above-market insurance rates. The Globe?s own editorial board estimated the value of these subsidies at $400 per year per urban car.
2. The high degree of regulation in the Massachusetts insurance market has led major national insurance firms (Allstate, State Farm, GEICO, Progressive, Liberty Mutual) to leave the state. Auto insurance is provided by smaller state-based firms whose business (and political influence) is concentrated here in Massachusetts, and who will therefore fight to their last lobbying dollar to preserve the present regulatory climate that keeps national competitors out of “their” market.

I doubt that the emergence of market pricing, if it ever happens, will be rapid. Subsidies are highly addictive, and their removal is painful. Deval Patrick has not shown he can stomach the kind of pressure that removal of these subsidies would entail. I?d be delighted to be wrong about this, though.

I’d have to agree on all counts.

However, the article does also bring to mind some thoughts I’ve had in the past.   It can be an interesting mental and economic exercise to debate whether auto insurance ought to be mandatory.  Wrapped up in any such discussion is the unfortunate reality that frequently, the folks who are the most expensive to to insure are the least able to bear the cost of the risk they present.

Such thinking brings us to the question of the appropriateness of subsidization of risk for such individuals, on the basis that auto insurance “should” be mandatory and in much of the country driving most folks “have” to have a car and drive to work, to the store, etc.

Even though I’m neutral on the idea of mandatory auto insurance, and I am very much pro-free-market when it comes to insurance underwriting and pricing, I can see the appeal of such an idea.  And it’s understandable why socialists-in-liberal clothing in Massachusetts might be so against deregulation.

Therefore, I’ll reinject an idea I’ve offered before into the blogoshpere for your consideration:  When it comes to regulating auto insurance, you don’t have to think of the product as a discrete entity.  It would be possible to divide the product into two parts — a primary, mandatory component, and an optional, excess component.

If residents of a state deem that it is in society’s best interests that everyone carry some level of auto insurance, and that it be as affordable as practical, then it would be understandable that tight regulation be placed on this primary level of insurance.  I’d also argue that such a product has now become a social tool rather than insurance, and therefore the risk should be borne by the state…but that’s a monologue for another day.

With that primary level of coverage addressed, it should be much easier for all but the most hardcore socialists to stomach deregulation of the excess, optional coverages, allowing the free market to work its magic.

However, like everybody else, I question whether the political will exists in Massachusetts to actually take any significant steps toward deregulation.  And if such a move is made, political realities will oblige that changes be dragged out over several years, plenty of time for legislators in need of votes or activists wielding initiative petitions to derail the process.