Insurance companies are basically happy with the state-by-state system of regulating auto insurance. But apparently the "regulatory" in "regulatory system" has got to go.

That was the message sent from insurance companies and trade groups to the federal House of Representatives' Financial Services Committee at an Aug. 1, 2001, hearing on automobile insurance regulation. Titled "Over-Regulation of Automobile Insurance: A Lack of Consumer Choice," the hearing included testimony from the Alliance of American Insurers, the Independent Insurance Agents of America, and the National Association of Independent Insurers, all industry trade groups. One consumer advocate, J. Robert Hunter of the Consumer Federation of America (CFA), offered an opposing viewpoint.

Testimony from insurers at the hearing praised the state-by-state insurance regulatory system and discouraged discussion of federal oversight of the insurance industry.

Central to the hearing was the auto insurance marketplace mess in Massachusetts and New Jersey, where insurers contend that too much regulation has led to higher prices, lower profits, and poor consumer choice. In those states, premium rates for car insurance are tightly regulated — in Massachusetts, the insurance commissioner sets the rates, and in New Jersey, auto insurers have had no success in raising auto insurance premiums.

That, insurers say, has forced four auto insurers to leave New Jersey, including State Farm Indemnity Co., the state's largest auto insurer. And two-thirds of the nation's 15 largest auto insurers refuse to sell auto insurance in Massachusetts.

The solution? Insurance companies would like more states to imitate Illinois and South Carolina, where insurance companies are free to price policies however they like, promoting what one trade group calls "an excellent example of the consumer benefits to be gained from a competitive marketplace."

Insurers contend that too much regulation has led to higher prices, lower profits, and poor consumer choice.

"These are states which rely on competition rather than rulemaking to establish rates," says Ken Schloman, Washington counsel for the Alliance of American Insurers, a property-casualty trade association. "Our ultimate position is that these problems are best handled by the states, not by the federal government. In those places where the auto insurance market does not work very well, we believe strongly that we should work with the state legislators, regulators, and consumer groups to try to arrive at a solution that makes the market function properly."

"California has regulated auto insurance, and rates there are actually falling. Where's the evidence that rate regulation is the problem?" counters Robert Hunter of the CFA, who also testified at the hearing. Hunter argues that in the case of New Jersey, it's the state's high traffic density — nearly three times the national average — and medical-benefits system that gives the state the highest auto insurance rates in the country. And in Massachusetts, he says, insurers that operate inefficiently, meaning that they do not effectively control their expenses, have chosen to stay out of the state.

Insurance companies frequently argue that auto insurance rate regulation is bad for consumers because it diminishes consumer choice and raises prices. "In my view, that's a mistake," says Hunter. "That would promote discrimination such as unfair use of credit scores. That kind of thing needs government oversight, and this kind of hearing is meant to pressure states to remove consumer protection."

The federal government has no jurisdiction over auto insurance. Schloman says the point of the hearing was "to educate the Financial Services Committee members as to the issues facing the insurance industry."

"This hearing was a fund-raising opportunity for Republicans," Hunter says, citing the Republican committee head's "invitation" to the industry to present its viewpoint.