To be a master and worthy of debate on insurance industry issues, you must be a nerd. Insurance is complex, boring, and full of counterintuitive issues. There are moments in the evolution of an industry when a fresh piece of scholarship does more than add to the academic debate. It forces us to confront what we have conveniently forgotten. A forthcoming law review article by Brian Shearer, “Regulating Insurance as a Public Utility,” 1 does exactly that.
For decades, the drumbeat from certain corners of the insurance lobby and other free-market academics has been to deregulate, let the insurance markets work, and prices will find their natural level. That argument has always sounded neat, tidy, and economically elegant. It has also always ignored history and reality.
Brian Shearer’s work reminds us of a truth many in the industry would rather not revisit. Insurance was never treated like a typical free-market product. It was regulated because it could not be trusted to behave like one. I discussed this in part 17 years ago in A Balanced Perspective Regarding the Politics of Insurance Legislation:
Would the insurance companies and their lobbyists ever be honest and completely transparent regarding their legislative agendas, motives, and goals? Could you imagine if our elected representatives demanded honesty as a prerequisite to legislation? Given that some are mutual insurance companies and owned by the policyholders (like State Farm), you would think they would never have a legislative agenda that would harm consumers by raising rates or avoiding consumer protection statutes.
So, why not require insurance companies to show their internal records regarding their motives in influencing legislation? After all, insurance is a business involving the ‘public trust.’
More than a century ago, policymakers looked at the same problems we see today. There were premium spikes, insolvencies, discrimination, and market manipulation. Reaching the conclusion that insurance was too important to be left solely to private incentives, leaders one hundred years ago learned they had to treat the insurance industry like a utility. They treated it like a public trust. That was not an accident. It was a response to repeated failure that still exists today.
Insurance is not a luxury good. It is not discretionary. It is the backbone of economic security. Homeowners cannot get mortgages without it. Businesses cannot operate without it. Drivers cannot legally be on the road without it. When a product is this essential and exists to serve the general public, the rules change.
What makes this current law review article particularly compelling is that it does not rely on nostalgia or theory. It lays out an economic reality that we are paying far more for insurance than necessary. Loss ratios have dropped. Profits have climbed. Expenses, especially those tied to advertising, have ballooned. The result is an industry that extracts far more than it pays out.
The response of the insurance industry and its coordinated lobby has been predictable. When regulators push back, insurers threaten to leave. When prices are challenged, they warn of collapse. When claims are denied, they point to fine print. What they absolutely abhor is transparency about all of this so that the truth is known to regulators and the public. The research shows that those tactics are not new. They are part of a long playbook that dates to the early 1900s. Policymakers saw through it then. The question is whether today’s regulators will do the same.
What is particularly striking is how modern the old reasoning sounds. Insurance was viewed as a “tax”—a mechanism for spreading risk across society. Courts recognized its “public interest” nature. Legislatures imposed oversight not to punish insurers, but to protect the system itself. We have drifted far from that understanding.
Today, the conversation is dominated by calls for insurers to deregulate or their surplus lines friends, often framed as necessary to “increase availability.” But availability at what cost? A market where coverage exists only for those who can afford ever-increasing premiums is not a functioning market. It is a failure disguised as efficiency.
The better question is not whether insurance should be regulated like a utility. It is why we ever stopped treating it that way. The answer, of course, lies in ideology. Over the past fifty years, we have been told that markets solve problems better than regulators. Sometimes that is true. In insurance, history proves that it is not.
Insurance is a unique product because the consumer cannot accurately value what they are buying at the time of purchase. You do not know if you will have a loss. You do not know if your claim will be paid. You do not know if the coverage you think you have will respond when disaster strikes. That uncertainty is just one reason why the system requires extensive regulatory oversight.
Shearer’s conclusion deserves to be read slowly, and then read again:
Policymakers over 100 years ago created rate regulation because they did not like how insurers were pricing insurance. Sometimes insurers charged too much. Sometimes they charged too little and caused market crises. Sometimes they discriminated. So policymakers chose a simple solution and gave a government official authority to approve and reject prices to stop these outcomes.
America finds itself in an affordability crisis, and the price of P&C insurance is, once again, too high. P&C insurance is a practical necessity for both businesses and individuals, and so this is an equal problem for consumers and corporate America. Instead of deregulating insurance to increase prices even more, policymakers should use utility regulation to solve this problem, through more muscular use of existing authority and new reforms taking from the long tradition of utility regulation of insurance.
That is not just an academic conclusion. It is a warning. If history teaches anything, it is that unregulated insurance markets do not self-correct. They overreach, they collapse, or they exclude. Often, they do all three. The promise of insurance is simple: protection when it matters most. When that promise is eroded—by pricing, by denials, or by complexity—the entire system loses legitimacy.
We are at one of those moments again. The question is whether policymakers will remember why their predecessors acted in the first place or whether we are destined to relearn the same lessons the hard way.
I would suggest those interested in this topic read Are We Being Overcharged for Insurance, The Regulatory Blind Spot: How Insurance Departments Fail to Detect Systemic Bad Faith Claims Practices, and Is the Insurance Regulatory System Rigged from Within? Jay Feinman’s Warning on “Cultural Capture.”
Thought For The Day
“The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.”
— Franklin D. Roosevelt
1 Brian Shearer. “Regulating Insurance as a Public Utility.” Columbia Business Law Review [forthcoming].
