An Obvious Way to Lower the Cost of Insurance

by Brian Johnson on June 23, 2009

InsuranceAt a time when everyone is looking for a way to make their money stretch further, one solution to curb rising insurance costs is to regulate insurance at the federal, rather than state, level.  Such regulation would require tax payers to pay for one regulatory body (rather than fifty) and would allow the insurance providers themselves to more easily and more cheaply operate at a national level.  Thus the price of insurance  would go down through increased competition.

To better understand this point, we must first acknowledge that for every business, there is inherently a cost associated with operation—whether it be the cost of raw materials, the rent on a storefront, the salary of employees, etc.  For insurance companies, part of their operation cost is related to staying within compliance of state regulation.  As insurance is regulated at a state level, rather than the federal, the various laws that govern the operations of these companies change depending where you are in the country.  It stands to reason then, that the cost of staying in compliance in Georgia, doubles if the company must also stay in compliance in Montana.  A company that offers insurance policies nation-wide must pay an increased overhead so as to simultaneously stay in compliance for all of its customers in all fifty states.  With only one set of regulations, however, any state insurer could make the transition to a regional or national insurer without having to incur additional costs.  Thus a change in regulation would increase the number of providers in the market and would lower the overhead costs for all the insurance companies.  The combination of a lower cost structure and increased competition, would bring in a better price for consumers.

Moreover, by regulating insurance at the federal level, the industry gains two distinct advantages:

  1. Transferability of Insurance:As of right now, if you move to another state you will most likely have to switch your car insurance, your health insurance, etc. If you have a pre-existing condition it can be very hard to do that…
  2. Better Regulation:  As of right now, there are fifty regulatory bodies to watch over the business of insurance.  Obviously, when you have fifty goverment agencies doing the same thing instead of one you get a lot of inefficiencies in the way that regulation is conducted.  With one regulatory body, far fewer special cases would slip through the cracks.  Thus a federal regulatory body would allow insurance companies to better meet customer demands and would make the system itself better able to detect and respond to insurance irregularities and risks.

Given the increasing focus on health care costs and reform, it seems that federally regulating insurance is a bipartisan answer to lowering the cost of insurance.  Federal regulation lowers the cost of compliance and puts the companies into greater competition, thus creating insurance that is more affordable for everyone.

Discussion

Car Insurance G
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