How Regulators Quietly Drive Up Costs

Seen and unseen.

California political observers are understandably fixated on the goings-on in the state legislature, which is the living embodiment of what New York Judge Gideon Tucker wrote in an 1866 ruling: "No man's life, liberty or property are safe while the legislature is in session." Reporters and commentators also focus on major legal cases, which can at times pose an even greater danger to our liberty and property.

But unless they do something particularly egregious, the state's myriad regulatory agencies rarely get much notice. Sure, the little-known California Agricultural Labor Relations Board became the subject of much debate recently after its union-friendly officials refused to count the ballots of farm workers who were trying to decertify a union. That was the exception that proved the rule. How often are "rulemakings" the subject of public debate?

The answer, of course, is hardly ever—particularly when it comes to the arcane world of insurance regulation. Yet California's Department of Insurance routinely proposes new rules that are costly and counterproductive. The agency holds public hearings, of course, but who—outside affected insurance companies and trial-lawyer-backed consumer activists—ever really notice?

Earlier this month, the department issued two proposed rules, both scheduled for hearings in late April. The first comes with the banal heading: "Auto Body Repair Labor Rate Surveys." According to the department, "The regulations will clarify the standards that govern the procedures for conducting and reporting the results of Auto Body Repair Labor Rate Surveys with the department." One's eyes might glaze over reading this, but the result, if approved, will be quite significant.

These labor-rate surveys are conducted by insurance companies to determine the standard costs for auto repairs in state-of-the-art facilities. Basically, the companies query body shops and determine the prevailing rate in each geographic region. They must provide those surveys to the insurance department. The first part of the new rule is of little consequence: It requires insurance companies to provide surveys in a consistent format that helps the department post them on its website.

But we find the real significance deeper in the jargon-filled explanation: "The department received hundreds of complaints from consumers and auto body repair shops, alleging specific instances where consumers were forced to pay out-of-pocket costs, or shops were deprived of their reasonably charged rates due to outdated and unreliable surveys." In other words, insurers pay claims based on those regional hourly rates. If a customer wants to use a costlier shop, that customer might have to pay the difference out of pocket.

Essentially, the department is pushing insurers to follow its standards for determining labor rates, which will increase the hourly costs that insurers must pay. The department said the regulations will "prevent auto body repair shops from facing the dilemma of whether to accept a financial loss, or bill the consumer for the shortfall between the insurance payment and the estimate cost of repair."

Adopting this rule will, of course, drive up the cost of insurance-covered repairs. The department estimates an additional cost of $560,000 a year.

The second proposed rulemaking comes under an equally banal-sounding headline: "Anti-steering in Auto Body Repairs." Anti-steering provisions are meant to stop insurance companies from directing customers to use auto-body-repair shops the insurer prefers, rather than the customer's own preference.

The new regulations, if approved, would require insurance companies to inspect a damaged vehicle within six business days. It would forbid them from requiring customers to travel more than 10 miles in urban areas and 25 miles in rural areas to have the vehicle inspected. It would limit any comments insurance companies could make about a particular auto-body repair shop as a means to dissuade customers from choosing that shop.

Such rules become more significant when one considers how automotive and casualty insurance rates are determined in California. Voters approved Proposition 103 in 1988, which not only froze those insurance rates, but created an elected insurance commissioner with the power to approve or reject rate increases. As a result, the Department of Insurance has more say than market forces in determining insurance rates. Insurers can't simply raise or even lower rates without the department's blessing.

That means that regulators are not just setting ground rules for the insurance industry. They are determining the actual prices that are charged and paid. So when new regulations are approved, they often drive up the cost of doing business and drive down profitability. It creates pressure for insurers to come back to the department and seek rate hikes, distorts the insurance market, leads to fewer consumer choices and erodes the state's business climate. It crushes competition, which is the real way to drive down rates for insurance and everything else.

It's hard to see this in action, given the hard-to-find rulemakings and bureaucratic lingo officials use to describe them. But this unseen hand of government has as much to do with California's business-climate problems as the high-profile actions in the Legislature and the courts.

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