Florida Governor vetoes Legislative Bill that gave State Farm clearance to charge higher fees than all other regulated insurance companies

Gabrielle D'Alemberte

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In 1348 Europe was devastated by the Black Plague (now thought to have been bubonic plague, or Yersinia pestis). It killed somewhere between thirty and sixty percent of the population of Europe. One of the many effects of that demographic tragedy was an enormous reduction in the number of working age men. As we might expect, those workers who remained were much in demand, and expected higher wages as a result. While this would have been delightful for the workers and their families, it would also have meant higher costs for employers.

The response to this, from the nobility of England, was the Ordinance of Labourers of 1349. It essentially attempted to cap the wages of working men at what they had been prior to the plague. Let’s cut to the chase and simply note that this attempt was an abject failure, with both workers and employers ignoring it. When this proved ineffective, the English parliament responded with the Statute of Labourers, enacted in 1351. Presumably the nobility felt that the peasantry would respond better to a differently named law. They did not.

So why would anyone begin a blog post ostensibly about legislative attempts to alter insurance pricing in Florida with some dry-as-dust account of strange legal things that happened in England almost seven hundred years ago? Because it illustrates beautifully two points that I’d like to make. First, the folks with the powers to make laws make laws that benefit themselves. Second, more important than anything else, that laws have consequences, regardless of the intent of the legislators.

Typically, when prices are viewed as unfair we attempt to control them by enacting laws that keep prices low or high. Anti-gouging statutes are an example of the former, farm price supports and minimum wage laws are examples of the latter. In Florida for example, it can be extremely expensive to obtain homeowners insurance. Its the primary complaint I hear from friends who are struggling to support their home expenses within their current salaries.

The required homeowners insurance, windstorm insurance and often flood insurance, has been unpopular with homeowners in Florida and in some instances, caused wage earners to be left out of the satisfying experience of homeownership. In response to the unhappiness of their constituents, the Florida legislature has passed laws controlling the prices insurance companies are allowed to charge in Florida. It is called a State protection- and its necessary to protect Florida's families, who are typically less sophisticated than a huge insurance giant, and frankly, it is an obligation of each state. These regulations, these protections, are fantastic; the will of the people has triumphed. So why are Floridians not playing pin-the-tail-on-the-donkey and wearing lampshades on their heads?

Because over the last several months, one particular insurance firm, State Farm, has been lobbying hard to be allowed to raise its rates and to not have any responsibility about price fixing or reporting. State Farms claims that its Florida rates simply aren’t high enough to continue operations in Florida.

According to it's own website, "State Farm Bank is a nontraditional financial institution and does not have branch offices. The bulk of direct customer interaction and product assistance is provided by State Farm® agents, augmented by a telephone call center, mail and the Internet. As of December 31, 2005, the Bank held $12 billion in total assets."

Earlier this year the Florida legislature agreed, and passed a law allowing State Farm to increase its prices by almost fifty percent. On June 24 of this year however, Florida governor Charlie Crist vetoed that law. State Farm is now threatening to stop offering any property insurance in the state of Florida. Can this be described as retaliatory? Absolutely. So who is wearing the pants in Florida? The Government, elected officials as the protector of it's constituents, or insurance companies? WHO HAS THE POWER and WHY DO Florida Legislators excuse, even vote for insurance companies to gouge the people who put those same Legislators in business? It wasn't always like this. There was a day in Florida, during the 1970s and 1980s when the Florida Legislator acted with far more responsibility to its citizens.

Presumably there is some price point below which an insurance company cannot go if it wishes to remain in business. Is State Farm currently at that price point? I’m not qualified to have an opinion on that matter. Probably the legislature has a regulatory board staffed with experts in the business of insurance. A question then, is where does one go to find experts in a particular business because the general public, friends like mine, all have the same opinion, the rates are already prohibiting hard working people from owning homes.

Traditionally one of the main answers has been, rates get set by the regulated industry itself. This is convenient for industry, as it allows them to essentially choose the staff of the agencies which are supposed to limit it. It is also extremely convenient for legislators, as saves them from having to learn any bothersome details, it is far easier to determine the preference of a small group of lobbyists than the desire of the whole electorate, and industry can generally be relied on to pony up massive sums of cash come reelection time.

Most voters in Florida have more pressing things to do than monitor every thing their legislature does. This is in fact, the very point of representative democracy. Industry however, doesn’t need to monitor everything, only those matters which directly affect their bottom line. Moreover, industry has enough resources that they can dedicate money and manpower directly to monitoring just the small number of issues they care about. Insurance pricing is a matter of secondary concern to the voters, but of primary interest to insurance companies. Further, the benefits of any change in pricing are very small for any individual voter, but in the aggregate they are enormous for insurance companies.

In economist’s jargon this is a situation where the costs are diffused but the benefits are concentrated. When this occurs, companies have every incentive to take over the very agencies in charge of regulating them. This dilemma is known as regulatory capture, and has been a serious problem at least since the 1880s, when the Interstate Commerce Commission was created to regulate railroad rates.

There are really only two possible explanations for State Farm’s actions in Florida. First, if State Farm is to be believed in their claim, then they are lying to potential investors and the world by posting contradictory information on their own website. If State Farm really cannot make enough money under the old pricing structure to continue doing business in Florida, then hey, they can't. I suppose like when I can't afford a pair of shoes I really want, it just means I don't get them. If they can't afford it, they don't don't it, right?. Or, maybe State Farm is simply running a bluff in order to better their bottom line. And the Florida Legislators that voted "yes" on the Bill that proposed to allow State Farm's prices to go unregulated are getting some hell of a bonus, whether directly or in soft money, but be certain they are getting something in exchange for selling out the people that they count on to vote them into office.

Which is the correct explanation? It’s difficult to say, but to his credit, and certainly against much political pressure from his own party, Governor Crist vetoed the State Farm bill and vetoed their unregulated price increases. Now, it's time to remember who has the power after all and let's think about asking State Farm to leave Florida all together finally sending a message to insurance companies that while they are entitled to succeed and profit in our state, they cannot do it by gouging the citizens. Now the questions is what message to send those legislators that actually voted "yes" and passed this bill. What message do we send them?