1/18/2010

Can you legislate on how to run a business?

One of the big dilemmas for any country's government when it bails out a business deemed "too big to fail" is how far it should go in managing that business. There is a temptation to actually start calling the shots whenever this is seen as necessary to protect the interests of the taxpayers whose money is bailing out the company. For example, if tax dollars are propping up a bank that has lent hundreds of millions to home buyers, should the government tell the bank to take a less aggressive approach to foreclosures? You only have to look at the public anger when top executives in these businesses started awarding themselves big bonuses, claiming their performance as managers justified these rewards.

The insurance industry in Michigan is up in arms so there must be something good for consumers happening there. The Property Casualty Insurance Association of America is leading the fight against a threatened attack on their members' profits. The Board of State Canvassers in Michigan has just approved a petition for ballot in 2010. Despite the fact the insurance industry has remained profitable, paid its taxes and maintained its employment levels, the petition's supporters allege insurers have been making excessive profits during one of the worst recessions in the last century. If the voters back the initiative, the legislature will be empowered to produce a number of direct limits on the way the industry assesses risk and sets the premium rates. The headline to sell this to the voters is genuinely eye-catching. The aim is to cut premiums on all insurance types across the board by 20%. Because drivers have been claiming that premium increases have been victimizing them, the initiative adds a further 20% cut for the best drivers. This shifts the risk profiling approach from the current factors such as zip code, credit score, marital status, etc., to factors directly assessing the driving skills of the individual drivers such as the driving safety record, the number of tickets issued, and so on.

The petition also acknowledges the insurance industry is likely to try to manipulate rates so there are a number of specific consumer protection or fair trade limits to be applied by the state's insurance commissioner. He would reduce premiums thought excessive, prohibit insurers from cancelling the policies of those who complain, and so on. With some cheap auto insurance premiums potentially falling by 40%, the industry is alarmed. There are dire predictions of insolvency. So in the run-up to the voting, it will be interesting to see how the insurers react. If the auto insurance quotes rise fast in the next six months so that a forced reduction will be less painful, the voters will see greed and vote accordingly. But a fall in the quoted rates will produce some interesting politics.

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