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Facing the Quasi-Sovereignty of Insurers


Sarena Martinez is a DPhil candidate in history at the University of Oxford.

This post is part of a symposium on the law and political economy of insurance. Read the rest of the posts here.

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Americans are in the midst of a crisis in the availability and affordability of insurance. In 2023, average car insurance premiums soared 24 percent relative to 2022, increasing at a pace 6 times faster than wages. For low and middle-income Americans that rely on cars to access jobs, their options are grim: accept reduced coverages, downsize cars, or forgo insurance entirely and risk the consequences in the 49 states where auto insurance is mandated by law. 

Missing from the coverage of this crisis is the reality that private insurers are quasi-sovereign actors who source power from their status as private purveyors of mandated goods. They manage proprietary data, and operate robust public relations, campaign finance, and lobbying machines. Their power is reinforced by their conglomerated status: the same companies that provide auto insurance also sell life, homeowners, property, business, and natural disaster insurance. This power, carefully amassed over the past century, reinforces their agency to draw and price risk pools, effectively determining who can access the economy and at what price. 

Insurance is regulated state by state, in a patchwork system that limits oversight and accountability, a consequence of the industry-supported 1945 McCarran-Ferguson Act. This act made the “business of insurance” state-regulated with exemption from federal antitrust standards. Each state then designed its own regulatory framework and administrative apparatus in the decades that followed. Most states decided to entrust the regulation of the militantly organized and conglomerated insurance industry to lone state insurance commissioners. These individuals are elected in 11 states and appointed by the governor or a special commission in 39 states. In theory, state insurance commissioners are in charge of guaranteeing consumers’ access to insurance, but in practice, they lack the resources and political heft to hold insurers accountable. 

In 2023, insurers constricted or withdrew insurance products from markets in states such as CaliforniaLouisianaFlorida, and Texas. These actions reminded commissioners that if the industry did not like the terms of regulation, they could (and would) simply walk away, withholding a critical and legally-mandated good. As the Georgia Deputy Commissioner, Steve Manderes, told The Washington Post when interviewed about Allstate’s 40 percent rate increase in 2022, “there’s one thing worse than rising rate hikes and that’s not having coverage at all.” 

For insurance commissioners, the job of managing the insurance crisis is thus predicated on carefully securing the industry’s consent for regulations. This is precisely the role that California Insurance Commissioner, Ricardo Lara, played in 2023 to coax insurers, who threatened to withdraw from the state, back to the negotiation table. Lara’s handshake deal consisted of insurers agreeing to expand their presence in disaster-prone areas, in exchange for functional autonomy to set rates at whatever price the companies’ own proprietary “forward-looking catastrophe” models suggested appropriate. In addition, there are allegations that Lara accepted secret campaign donations from the insurance industry.

California, 1988: The Battle to Regulate Insurance 

This is not the first time that California has been at the epicenter of an insurance battle. In 1988, Ralph Nader and Voter Revolt spearheaded an effort to regulate auto insurers through the Proposition 103 state-wide referendum. The referendum proposed reforms such as the transition from an appointed insurance commissioner to an elected one with the power to approve rate hikes, the incorporation of a statewide consumer advocacy organization, an immediate 20 percent rollback of auto insurance rates, and restrictions on the use of territorial rating in rate calculation. The insurance industry spent $63.8 million dollars—$163 million 2023 dollars—aggressively lobbying, submitting additional referendums, and deploying PR campaigns; it outspent proponents of Proposition 103 by 30-to-1. 

On November 8, 1988, Proposition 103 squeaked by with 51 percent of the vote, buoyed by Los Angeles voters outraged at their sky-high auto premiums. “Hell hath no fury like a major industry scorned,” commented a reporter, writing that the following day insurers filed 13 lawsuits challenging the constitutionality of Proposition 103. Then, in a boycott deemed “absolutely hysterical” by Judith Bell, the San Francisco Consumers Union spokeswoman, 50 insurers announced they were either leaving the state or refusing to write new policies. The boycott ended only when the California Supreme Court agreed to hear the industry case challenging the constitutionality of Proposition 103. In a series of decisions over years, the Court upheld Proposition 103, but revised exemption conditions for the stated 20 percent rollback on auto insurance rates. 

The Proposition 103 story is an example of how the industry used its market share to influence the courts and regulators with impunity—clear evidence of its quasi-sovereignty. But it is also a story about the power of political mobilization to successfully serve as a counterweight to the industry’s power. Before the referendum, insurers in California were governed by the laissez-faire 1947 McBride Act, which stipulated that “open competition” regulated the marketplace. Proposition 103 made rate approvals by a new insurance commissioner mandatory for the first time. Between 1989 and 2010, it was the only state in the country to experience decreased consumer auto insurance expenditures. Because the Proposition 103 battle was so high profile, it raised awareness nationwide about how to challenge insurer power. Over 1,000 auto insurance regulatory reform bills appeared in 1989 across the country.

Building Inclusive Insurance Futures

The world is different today than it was in 1988, but at the heart of resolving our insurance crisis today are longstanding questions about how much power insurers should have to determine access (and its price) to the economy. Conceptualizing insurers as quasi-sovereign recenters the role of politics not only in the creation of the insurance crisis but in its resolution. 

In the industry’s telling of the story, insurers are mere administrators of a mandated good. The insurance crisis is solely the result of factors such as inflation and climate change, outside of the control of insurers or commissioners. These are critical factors, but only considering these yields one practical solution: individual consumers must become savvier risk managers and absorb more risk. Popular outlets that offer financial planning advise readers to “shop around” to manage the crisis and accept decreased coverage as long as they take care not to “reduce coverage to the point where you’d be wrecked financially if catastrophe strikes.” This solution is a death knell for inclusion in the economy, and in the insurer narrative there is no other choice. 

By contrast, recognizing the political power wielded by insurers forces us to acknowledge that defining and pricing “risk” are political endeavors. A central axiom of insurance is that the insured are supposed to pay a premium proportionate to the amount of risk that they represent. But to insurers “risk” is defined by race (by proxy of zip code), age, gender, credit score and marital status. These variables safeguard industry profits, because the “risky” (the urban, low and middle income, minorities) subsidize the premiums of the “safe” (high income, white, suburban drivers). Moreover, the “safe” are often protected by other tangled systems of risk: a judicial system more likely to find Black residents at fault for accidents, a credit score that penalizes the poor; a police system that may not collect precise accident data in certain zip codes; and more recently, the rise of telematics which could, for example, label irregular commutes characteristic of precarious work as risky. 

In 2023, 66% of Americans did not even know their credit information was used to calculate auto insurance premiums—highlighting the need for consumer education campaigns. And insurers have been found to engage in surreptitious surveillance of consumer driving facilitated by automakers and data brokers such as LexisNexis, implicating questions of consumer data protection. Relatedly, given the economic power of insurers and the potential for regulatory capture, just as important of a question is how to hold insurance commissioners (and more broadly regulators) accountable. In the face of climate change, we will ultimately need to decenter the need for private automobile ownership entirely. Quasi-sovereigns are made, not born, and unmaking their power begins with accountability, transparency, and robust consumer protection.