Consumer Advocates

About 6 years ago I was asked to be the state consumer advocate for the insurance consumers in Georgia.  I didn't really want the job which I viewed as a way of punishing the department of insurance (controlled by a republican insurance commissioner) by the then democratic governor of the state.*  I believed that I would be in a race with the insurance commissioner to show up first (in a fancy hard hat) on the scene of tornado or other natural catastrophe to complain about company X's disaster preparedness and claims paying response.  Alternatively, I viewed myself in a hospital delivery room (in nicely starched, but stylish scrubs) watching truly exhausted women being thrown out of the hospital after 24 hours because their health insurance company would not pay for any more nights.  Both of these scenes would have been on the 11 o'clock news, of course.  The salons of Atlanta would have been a buzz and  I would have had a groupies just waiting for my next brainstorm on how to further demonize the evil insurers.  (I probably would have ditched credit scoring because there is no credit scoring costume I could wear to give me some great exposure on the news......)

In passing, I noted in today's IJ there is an article about a Florida bill that would appoint a consumer advocate for insurance.  This made me wonder if anyone had assessed the performance of consumer advocates in the public utility area where they have been operating in some states for 20+ years.  Holburn and Spiller have a recent working paper that provides econometric evidence of the advocates' effect on prices and profits.

(from their abstract) We find first that utilities postpone rate reviews in states with consumer advocates and elected commissioners. Second, we find that ... states with consumer advocates and elected commissioners tended to grant lower ROEs. Additionally, the estimated effects are economically significant: consumer advocates and elected commissioners are associated, respectively, with 0.19 – 0.37 and 0.56 – 2.1 percentage point reductions in the allowed ROE, ceteris paribus. Changes in rate ratios, however, eliminate these consumer gains: consumer advocates are associated with higher residential-industrial rate ratios, resulting in higher net residential rates. Elected commissioners are associated with lower residential-industrial rate ratios, resulting in higher net industrial rates. Our findings constitute some of the first statistical evidence that institutionalizing interest group representation in agency procedures is a powerful way for legislatures to influence regulatory policies. (emphasis mine)

If we apply this public utility result directly to the Florida insurance market (not exactly fair--I know) which has an Elected "Insurance Commissioner" in the form of State CFO Tom Gallager, then insurers would have lower rates of return on equity.  The difference between insurance and public utilities is that insurers do not have to operate in the state in the short run.  Utilities have state specific physical capital and must use it or lose it.  Insures can allocate their financial capital anywhere.  To the extent that Florida already has kept insurance prices low (which is evident as the state's own insurance company is among the biggest providers of insurance in the state), how much value can an insurance advocate actually add?  If the regulatory environment were to become more contentious, then insurers are likely to reallocate their physical capital to other states or lines of business.   Yesterday's IJ noted that insurers were contributing more capital to their Florida operations, but in all likelihood they are not likely to contribute the capital needed to cover additional homeowners if Florida restricts what they can charge.

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*Selfish disclosure alert:  I would have taken a significant pay cut and probably lost my tenure too.  Bummer.  So, there were just so many reasons to just say no even with the great costume opportunities.  One just gets plain tired of pipe and brown tweed sports coats with leather elbow patches.  Also, the new republican governor fired the consumer advocate and I am not sure what they did to replace her.  I am sure he wouldn't have fired me, though, as the risque-wife thinks I look good in a hard hat and scrubs-- especially if one squints hard!