In 2019, an auto insurance study published by the Consumer Federation of America compared the regulatory framework of California with states across the country; California’s prior approval system had saved California drivers $154 billion on automobile insurance policies over a 20-year period, outperforming many states, Oklahoma included, that operated on a file-and-use regulatory framework, the study said.
The McCarran-Ferguson Act of 1945 empowered states to create their own regulatory frameworks. These frameworks can be broadly characterized as either file-and-use or prior approval.
Prior approval means that insurance companies must submit rate change filings to regulators before they are applied to customers, to ensure that rates are not excessive.
File-and-use (or use-and-file) means that insurance companies file rates and instantly begin charging customers. In some file-and-use jurisdictions, actuarial scrutiny of rate filings to protect customers may come later, but in Oklahoma that scrutiny is never applied.
The 2019 Consumer Federation of America study got specific: had Oklahoma adopted a prior approval framework like California’s, Oklahomans would have saved $1 billion per year on automobile insurance alone.
California Was a Mess
The 2019 study was primarily authored by J. Robert Hunter, a veteran federal insurance administrator who ran the National Flood Insurance Program in the 1970s. That was when the organization cut ties with insurance companies that were overcharging the government and underpaying homeowners.
Hunter remembered well the moment in the 1980s when he was invited to give a presentation about insurance to the California Legislature.
California was a mess, Hunter said. The state’s property insurance rates were out of control — homeowners and auto — and their regulatory framework was as soft or softer than the file-and-use model that today gives insurers unchecked power in Oklahoma.
Hunter traveled to California to propose an entirely different model: prior approval. He had been invited to California by prominent Democrat and Speaker of the California State Assembly, Willie Brown; nevertheless, Brown publicly denounced Hunter’s proposal the moment he made it.
It didn’t matter. A California consumer advocate took up Hunter’s proposal, which became known as Proposition 103. $700,000 was raised to champion the effort against an $81 million counter-attack from the insurance industry.
That didn’t matter either. Voters approved Proposition 103 in 1986, and the measure passed constitutional muster two years later.
Hunter went on to serve briefly as the commissioner of the Texas Department of Insurance, and in 1980 he founded a consumer-oriented nonprofit watchdog group designed to monitor the insurance industry and educate consumers. In 1995, this organization was folded into the Consumer Federation of America, a consortium of 300 nonprofits dedicated to consumer protection.
Hunter has been called the father of insurance consumer advocacy.
In 2019, Hunter’s study “Auto Insurance Regulation, What Works 2019: How States Could Save Consumers $60 Billion a Year” reflected on two decades of Proposition 103, documenting the billions saved by California drivers.
If the entire country had adopted the same prior approval model as California, Hunter wrote, Americans would have saved $1 trillion.
It’s Not Just Homeowners Insurance
A recent Lending Tree study found that Oklahomans pay the highest average homeowners insurance rate in the country at $6,331 per year; the same study found that California ranked lowest, at $1,260 per year. As a percentage of average income, the difference between Oklahoma and California was even more stark: Oklahomans pay 6.84% of their total income on homeowners insurance; Californians pay 0.88%.
A new study from The Zebra ranked Oklahoma second only to Nebraska in homeowners rates at $7,246 per year. California paid $2,211.
The problem of excessive property insurance rates in Oklahoma is not limited to homeowners insurance. The same Oklahoma laws that are failing to protect consumers on homeowners rates are failing to protect Oklahomans from wildly elevated auto insurance rates.
Oklahoma Insurance Commissioner Glen Mulready has refused to speak to Oklahoma Watch on any aspect of the work of the Oklahoma Department of Insurance.
For comment on Oklahoma’s file-and-use system, Oklahoma Watch contacted former Oklahoma state legislator Marty Quinn, an insurance agent, and Farmer’s Insurance lobbyist Chris Meredith, each of whom has announced campaigns to replace Mulready after his term ends in 2026; neither responded.
Lending Tree Insurance Analyst Rob Bhatt said that Oklahoma’s file-and-use system was based on a core assumption: if one company is charging too much, other companies will come in to charge lower rates and still be profitable.
“That’s the theory,” Bhatt said.
Lending Tree does not take a stance for or against any state’s regulatory framework, Bhatt said. Proponents of file-and-use would point to competition as a driver of lower rates, speed in responding to acute market conditions, and reduced regulatory costs as the advantages of file-and-use systems, he said.
“That may work in theory, it may work in some states, but on its own, file-and-use is not always a perfect solution,” Bhatt said. “These factors alone don’t always guarantee lower rates.”
Bhatt also noted that the world today, in terms of population, construction costs and frequency of severe storms, was significantly different from when file-and-use systems were first established.
The Raw Numbers
Hunter’s auto insurance study drew a sharp contrast between Oklahoma’s file-and-use and California’s prior approval systems.
In terms of total money spent nationwide, Americans suffered a 61.1% increase in raw costs from 1989 to 2015. In that time, California’s prior approval framework ranked as second best in the country, with only a 12.5% increase over a quarter-century; Oklahoma’s file-and-use ranked 42nd with a 106.3% increase.
Isolating rates for liability insurance alone was even worse for Oklahoma.
Average liability rates nationwide increased 58.5% from 1989 to 2015. California ranked first, enjoying a decrease in rates by 5.7%; Oklahoma ranked 44th, with rates climbing 111.4%.
Hunter’s conclusion did not single out Oklahoma, but it might as well have.
“Some states have saved drivers billions, while others have allowed significantly increased costs for drivers,” Hunter wrote.
Hundreds of Billions in Savings
Oklahoma Senate Democratic Leader Julia Kirt, who has put out a call for public input for an interim study on homeowners insurance in the Senate Business and Insurance Committee on October 7, offered praise for Hunter.
“Are car insurance companies taking advantage of Oklahomans because our state law lets them? This report sure makes it look that way,” Kirt said in an email. “While I’m studying property insurance rates this interim, I will also be keeping an eye on car insurance to understand how our policies can do better across the board to ensure paying customers aren’t getting a bad deal.”
Prior approval frameworks have their skeptics.
In 2010, an analysis from the Property Casualty Insurers Association of America cited the National Association of Insurance Commissioners to acknowledge that rate regulation had little impact on insurer profitability; nevertheless, the analysis championed competition.
“More market-based systems lead to efficient allocation of resources, thus eliminating excessive rates and profits,” the analysis said.
More recently, a 2023 paper from the International Center for Law and Economics took direct aim at Hunter’s Proposition 103. The report acknowledged that rates in California had not yet gone up, but challenged Proposition 103’s savings to consumers on the grounds that the framework was slow to respond to acute market forces.
“The Prop 103 rating system is slow, imprecise, and inflexible relative to other jurisdictions,” the report said.
Padding of the Process
Hunter, 86, retired but continues to serve as emeritus insurance director for the Consumer Federation of America, rejected the claim that California’s Proposition 103 was slow.
Of course, prior approval’s scrutiny of rates before charging customers was slower than allowing insurers to charge without oversight, but the true delay was from insurance companies that took months to respond to questions about excessive rates, Hunter said.
“Insurance rates are still very low in California compared to the rest of the nation,” Hunter said.
Hunter’s study also challenged the assumption that file-and-use was better for competition.
“Just the opposite appears to be the case,” Hunter wrote, noting that stronger regulation had fostered robust competitive markets. “Prior approval states, in which insurance companies are subject to up-front scrutiny of their rate hikes, have yielded the best results for consumers over time.”
Of the years since the data of the 2019 study, Hunter offered cautious characterization of trends in ratings, acknowledging a slight narrowing in the last decade.
Nationwide rates had tracked with inflation until two or three years ago, when rates spiked to two or three times the rate of inflation, Hunter said.
Hunter could not rule out that insurance companies were artificially inflating rates; as an expert on homeowners and auto insurance, he was only too aware that in Oklahoma, home and auto rates were significantly elevated.
“I’m sure there’s padding of the process,” Hunter said. “I’m fairly sure of that.”
Even more disturbing, it might not be limited to property insurance.
“If it’s happening in home and auto, then it could be happening in medical malpractice and other forms of insurance, as well,” Hunter said.
