<blockquote>
<p>Was there a previous market failure which made it necessary to protect customers by regulating the rates?</p>
</blockquote>
<p>According to US <a href="https://content.naic.org/sites/default/files/inline-files/topics_white_paper_hist_ins_reg.pdf" rel="nofollow noreferrer">National Association of Insurance Commissioners</a> (NAIC) the officially stated reasons for this regulation are;</p>
<ul>
<li>equity/fairness concerns</li>
<li>informational asymmetry, insurance is too complex to understand for consumers</li>
</ul>
<p>Equity, and fairness concerns are not a market failure, but its probably the most important reason why this policy was implemented. Policies and regulations are not implemented simply to improve the efficiency but with fairness and equity issues in mind. Even a regulation that has detrimental impact on an economy can be justified if policy maker has preference for more equitable distribution of income/wealth/consumption. Depending on particular social welfare function it could be optimal for nobody to have insurance, if it leads to more equitable outcomes.</p>
<p>Informational asymmetry is market failure, but typical textbook solution to information asymmetry would be licensing or mandating some transparent uniform insurance plans. Price control is not necessarily to solve such market failure, and most of the times it would not be optimal way to solve this particular type of  market failure.</p>
<blockquote>
<p>Was there a previous market failure which made it necessary to protect customers by regulating the rates? If there was e.g. a monopoly or oligopoly or any other circumstance which led to a defunct market, shouldn't one have addressed that root cause?</p>
</blockquote>
<p>No this is root-cause fallacy. Suppose there was an insurance monopoly because of economies of scale. In that case it would not be more optimal to break the monopoly compared to price regulation (provided that we assume agency can regulate price such that it is equal to marginal cost).</p>
<p>This is because in such case monopoly can produce more efficiently and at lower costs than two separate firms. Hence prices may even be higher under competition in that case (if the inefficiency is so large that the effect on price is larger than the effect of market power).</p>

CC BY-SA 4.0
2024-05-15T16:32:07.750Z
Not even half convinced. As you say, "consumer is too stupid" would be fixed differently. Additionally, that would apply the most goods (Marx already noted that the fictitious free market required an "encyclopedic knowledge" on the consumer side").--Not sure what you mean with "equity" -- fairness, justness? How would a functioning market not be fair? And I think that generally, a well-functioning market is theoretically, systematically (hey, it's a free country) and usually practically preferred to a regulated monopoly which is always suboptimal. And aren't most insurers big?
Peter - Reinstate Monica
CC BY-SA 4.0
2024-05-15T16:46:34.180Z
@Peter-ReinstateMonica 1. fairness is normative concept. For some people charging too high price is morally objectionable. 2. Well that’s not true according to economic theory. A regulated monopoly can be preferable to competitive market under certain conditions like with increasing economies of scale that are so large that they are not reached even when whole market is supplied. Yes most of the time competition is more efficient and we can debate if government is actually able to regulate efficiently but theoretically in case I mentioned monopoly would be preferred.
1muflon1
CC BY-SA 4.0
2024-05-15T16:47:56.143Z
3. Big is relative, US is the biggest economy. Also depending on parameters of the competition even duopoly is enough to get same result as with perfect competition. And duopolies aren’t really regulated with prices
1muflon1
CC BY-SA 4.0
2024-05-15T16:50:19.233Z
In my own opinion I also think the second reason doesn’t make sense but it’s the officially stated reason (maybe the policy makers are just stupid - that’s always an option). The equity reason however makes sense. It might not be fair according to you or even most American values but policy is often determined by median voter or parties with concentrated interest. I can very well see some zealous person who believes any price increase above X is immoral crusading for this regardless of other economic consequences. For example, I think even economists who support min wage would say
1muflon1
CC BY-SA 4.0
2024-05-15T16:53:19.817Z
That the current min wage in California is too high, but there are moral crusaders who unironically want it to be raised even higher. Ultimately there is Hume’s guillotine you can’t get oughts from isses. Some people simply consider these policies moral for their own sake
1muflon1
CC BY-SA 4.0
2024-05-15T16:53:31.193Z
Are you arguing in seriousness that the home insurance market is one in which a regulated monopoly is more efficient than a market? By the way, since there is no insurance monopoly in most places (I think), this specific discussion is idle anyway because it does not apply: In most places we have a regulated non-monopoly, and you'll have a hard time convincing me that this is more efficient than a market with milder (e.g., some transparency/consumer protection) regulation. In fact, since this regulation leads to the collapse of the economic branch, it is clearly highly inefficient.
Peter - Reinstate Monica
CC BY-SA 4.0
2024-05-15T16:57:36.943Z
@Peter-ReinstateMonica 1. where did I say that? I said that **if** it would be a natural monopoly it does not mean it would better to break it up. 2. I am not saying it’s more efficient for insurance market in general. I am saying that for any market that has certain specific characteristics (specific production function) it can be shown regulated monopoly is better than competition (assuming benevolent social planner). It’s a well known result you can read in any textbook. It can be proven mathematically
1muflon1
CC BY-SA 4.0
2024-05-15T16:57:49.830Z
Your last two comments (which I didn't read before my last one) make more sense -- political, ideological reasons; false economic reasoning; placating voters, that stuff. Economic reasons only in the widest, political-economic sense.
Peter - Reinstate Monica
CC BY-SA 4.0
2024-05-15T16:59:43.833Z
@Peter-ReinstateMonica I also edited my last comment
1muflon1
CC BY-SA 4.0
2024-05-15T18:24:06.557Z
So you brought the "regulated monopolies can be more efficient" argument just to show that you have read the books, but it does not have any relevance here, right? ;-)
Peter - Reinstate Monica
CC BY-SA 4.0
2024-05-15T18:33:12.213Z
@Peter-ReinstateMonica no, it has relevance, you asked whether there was monopoly in past that should be addressed as root cause. My point was simply this; suppose as a thought experiment there was monopoly. Saying that you should address that as a root cause is fallacy, because apriori without analyzing the problem its not possible to argue solving root cause is better than lets say curing symptoms. If hypothetically there is somewhere monopoly, depending on what monopoly it is, it can be efficient to price regulate it instead of breaking it (again assuming government is up to task).
1muflon1
CC BY-SA 4.0
2024-05-15T15:45:13.987Z
2024-05-15T15:52:01.000Z
2024-05-15T15:52:01.000Z
1muflon1
<p>With increasing damages and volatility, home insurance companies increasingly withdraw from entire states, including former low-risk states like Iowa. I was puzzled by this at first: The normal response to increased risk would be to raise the rates; the normal response to unacceptable volatility would be to bundle the risks, for example through a reinsurer. There is no reason except in truly pathological situations that insurance can become permanently unprofitable. Sure, there may be bit of a lag before an insurer accepts that e.g. extreme weather events are now the new normal and raises rates accordingly, but that is no reason to withdraw from an entire market. In fact, the more storms there are and the higher the unpredictability is, the more reasons customers have to buy insurance, even if expensive, and the higher the chances are for the insurers to make a profit from that need.</p>
<p>Then I learned that states typically regulate the rates and apparently prevent the insurers to charge profitable rates. That seems not right for systematic and now also pragmatic reasons.</p>
<p>Was there a previous market failure which made it necessary to protect customers by regulating the rates? If there was e.g. a monopoly or oligopoly or any other circumstance which led to a defunct market, shouldn't one have addressed that root cause?</p>

<united-states><regulation><insurance>
Why do states regulate home insurance rates?
Peter - Reinstate Monica
# Why do states regulate home insurance rates?

(Asked by: username_0 on 2024-05-15)

With increasing damages and volatility, home insurance companies increasingly withdraw from entire states, including former low-risk states like Iowa. I was puzzled by this at first: The normal response to increased risk would be to raise the rates; the normal response to unacceptable volatility would be to bundle the risks, for example through a reinsurer. There is no reason except in truly pathological situations that insurance can become permanently unprofitable. Sure, there may be bit of a lag before an insurer accepts that e.g. extreme weather events are now the new normal and raises rates accordingly, but that is no reason to withdraw from an entire market. In fact, the more storms there are and the higher the unpredictability is, the more reasons customers have to buy insurance, even if expensive, and the higher the chances are for the insurers to make a profit from that need.

Then I learned that states typically regulate the rates and apparently prevent the insurers to charge profitable rates. That seems not right for systematic and now also pragmatic reasons.

Was there a previous market failure which made it necessary to protect customers by regulating the rates? If there was e.g. a monopoly or oligopoly or any other circumstance which led to a defunct market, shouldn't one have addressed that root cause?

**Tags:** united-states, regulation, insurance


---

## 1 answers

### Answer by username_1 on 2024-05-15. Score: 0

> Was there a previous market failure which made it necessary to protect customers by regulating the rates?

According to US [National Association of Insurance Commissioners](https://content.naic.org/sites/default/files/inline-files/topics_white_paper_hist_ins_reg.pdf) (NAIC) the officially stated reasons for this regulation are;

* equity/fairness concerns
* informational asymmetry, insurance is too complex to understand for consumers

Equity, and fairness concerns are not a market failure, but its probably the most important reason why this policy was implemented. Policies and regulations are not implemented simply to improve the efficiency but with fairness and equity issues in mind. Even a regulation that has detrimental impact on an economy can be justified if policy maker has preference for more equitable distribution of income/wealth/consumption. Depending on particular social welfare function it could be optimal for nobody to have insurance, if it leads to more equitable outcomes.

Informational asymmetry is market failure, but typical textbook solution to information asymmetry would be licensing or mandating some transparent uniform insurance plans. Price control is not necessarily to solve such market failure, and most of the times it would not be optimal way to solve this particular type of market failure.

> Was there a previous market failure which made it necessary to protect customers by regulating the rates? If there was e.g. a monopoly or oligopoly or any other circumstance which led to a defunct market, shouldn't one have addressed that root cause?

No this is root-cause fallacy. Suppose there was an insurance monopoly because of economies of scale. In that case it would not be more optimal to break the monopoly compared to price regulation (provided that we assume agency can regulate price such that it is equal to marginal cost).

This is because in such case monopoly can produce more efficiently and at lower costs than two separate firms. Hence prices may even be higher under competition in that case (if the inefficiency is so large that the effect on price is larger than the effect of market power).

> **Comments:**
> **username_0**: Not even half convinced. As you say, "consumer is too stupid" would be fixed differently. Additionally, that would apply the most goods (Marx already noted that the fictitious free market required an "encyclopedic knowledge" on the consumer side").--Not sure what you mean with "equity" -- fairness, justness? How would a functioning market not be fair? And I think that generally, a well-functioning market is theoretically, systematically (hey, it's a free country) and usually practically preferred to a regulated monopoly which is always suboptimal. And aren't most insurers big?  
> **username_1**: @username_0-ReinstateMonica 1. fairness is normative concept. For some people charging too high price is morally objectionable. 2. Well that’s not true according to economic theory. A regulated monopoly can be preferable to competitive market under certain conditions like with increasing economies of scale that are so large that they are not reached even when whole market is supplied. Yes most of the time competition is more efficient and we can debate if government is actually able to regulate efficiently but theoretically in case I mentioned monopoly would be preferred.  
> **username_1**: 3. Big is relative, US is the biggest economy. Also depending on parameters of the competition even duopoly is enough to get same result as with perfect competition. And duopolies aren’t really regulated with prices  
> **username_1**: In my own opinion I also think the second reason doesn’t make sense but it’s the officially stated reason (maybe the policy makers are just stupid - that’s always an option). The equity reason however makes sense. It might not be fair according to you or even most American values but policy is often determined by median voter or parties with concentrated interest. I can very well see some zealous person who believes any price increase above X is immoral crusading for this regardless of other economic consequences. For example, I think even economists who support min wage would say  
> **username_1**: That the current min wage in California is too high, but there are moral crusaders who unironically want it to be raised even higher. Ultimately there is Hume’s guillotine you can’t get oughts from isses. Some people simply consider these policies moral for their own sake  
> **username_0**: Are you arguing in seriousness that the home insurance market is one in which a regulated monopoly is more efficient than a market? By the way, since there is no insurance monopoly in most places (I think), this specific discussion is idle anyway because it does not apply: In most places we have a regulated non-monopoly, and you'll have a hard time convincing me that this is more efficient than a market with milder (e.g., some transparency/consumer protection) regulation. In fact, since this regulation leads to the collapse of the economic branch, it is clearly highly inefficient.  
> **username_1**: @username_0-ReinstateMonica 1. where did I say that? I said that **if** it would be a natural monopoly it does not mean it would better to break it up. 2. I am not saying it’s more efficient for insurance market in general. I am saying that for any market that has certain specific characteristics (specific production function) it can be shown regulated monopoly is better than competition (assuming benevolent social planner). It’s a well known result you can read in any textbook. It can be proven mathematically  
> **username_0**: Your last two comments (which I didn't read before my last one) make more sense -- political, ideological reasons; false economic reasoning; placating voters, that stuff. Economic reasons only in the widest, political-economic sense.  
> **username_1**: @username_0-ReinstateMonica I also edited my last comment  
> **username_0**: So you brought the "regulated monopolies can be more efficient" argument just to show that you have read the books, but it does not have any relevance here, right? ;-)  
> **username_1**: @username_0-ReinstateMonica no, it has relevance, you asked whether there was monopoly in past that should be addressed as root cause. My point was simply this; suppose as a thought experiment there was monopoly. Saying that you should address that as a root cause is fallacy, because apriori without analyzing the problem its not possible to argue solving root cause is better than lets say curing symptoms. If hypothetically there is somewhere monopoly, depending on what monopoly it is, it can be efficient to price regulate it instead of breaking it (again assuming government is up to task).  

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