The chair may be beautiful to look at, but if you use and break it-all hell is going to erupt. Have you noticed how nice an insurance agent is when he/she is selling you the auto, home or life policy? You leave feeling securely protected by riders and umbrellas. Most companies' images exude strength, protection and safety. You either have the Rock of Gibraltar or the largest pair of hands on earth ready to stand behind you. And like a good neighbor you expect them to be there when you need them.
There's only one glitch in this pleasant dream scenario, they do not like it when you make a claim. It is not that the insurance company won't pay-most of them are pretty good about providing the funds to restore a house or car. However, once they have paid you are catapulted into a new risk category. They may raise your rates, discontinue your insurance or worst of all not send you that neat 2001 calendar that you will be anxiously expecting come this November. Nobody expects insurance companies to be run as charities, but are they absorbing their fair share of the risk? [Insurance regulation in Transition- http://www.naic.org/1misc/aboutnaic/abou... ]
In a purely entrepreneurial environment, their share of the risk would be entirely determined by market forces. If no one could make a living selling insurance then none would be sold. If the public believed insurance had a very high value then the price would continually rise. However, we perceive insurance as a necessary evil, so we regulate the market and allow the notion of reasonable rates and fair return on investments to replace market forces. I do not know how you determine reasonable rates in the absence of a competitive environment. Fair rate of return on investment is garnered from the competitive marketplace for capital. The states believe that the insurance industry deserves a rate of return similar to investments in the risky free market. On the surface it appears that the industry is protected while the public must depend on the virtue of the regulators.[financial Services and the Environment- http://www.unep.ch/etu/finserv/finserv/Q... ]
Economically, public regulation has a bad track record for maintaining smoothly running efficient markets. The cost of the intervention generally has not been justified by the perceived public benefit. Public regulation has also suffered from a dysfunction known as "revolving door syndrome." The regulators are generally recruited from the regulated industry and intend to return to the industry after their public service is completed. This causes some to doubt the objectivity of the temporary public servants. The state of Florida has ruled that the Wind Insurance Industry deserves a significant increase in rates.
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