First California, now Michigan

Politics is endlessly surprising. The theory of democracy states the people have the power through the ballot box. The reality is slightly different with representative government. At preset intervals, the people have a say in who should represent their interests, and may vote on proposals and policy initiatives. This actually leaves them rather powerless. It's the elected representatives who have a better control over events, in consultation with all the vested interests and power brokers who have influence behind the scenes. This is not to condemn the current system as broken or corrupt. As it stands, it does have the benefit of being very slow-moving. There is always passionate debate when big changes are proposed. This means changes are more likely to be made for the right reasons.

For example, take a look at California. Its voters approved a Proposition to prohibit insurance companies from relying excessively on zip codes when setting premium rates. The argument is simply made. If the character of a neighborhood shifts from respectable middle-class to a more rundown area occupied by blue collar workers and their families, the rates start to change. If the racial profile of the population also changes to become more Latino or African American, rates change again. These changes reflect the statistical likelihood that certain types of crime will become more common including property damage, vehicle theft and vandalization, and so on. As the claims from that area rise, those living there should pay more. Except this is penalizing people based on the accident of where they live. There is a big difference between increasing the premium because of a bad driving safety record and hiking the premium because the racial profile of his neighbors changed. So Californian voted to outlaw using zip codes to set rates. After years of struggle, this became law and Californian insurers continue to operate profitably. All their protests they would be forced out of business have been proved a worthless gambit.

Now Michigan is threatening to go further. The Board of State Canvassers has approved a petition for a ballot initiative to reform insurance practice in Michigan. If the supporters get 300,000 signatures, this will go to a vote in 2010. The headline is a promise to reduce the premiums of all insurance products by 20% and, by a shift to personal risk assessment, reduce auto insurance premiums by a further 20%. Just imagine - premiums for good drivers drop by 40%. Taken as a whole, the law would be used to prohibit insurers from relying on irrelevant factors like the zip code and credit scores.

Instead, risk would be assessed on the personal characteristics of each individual policy holder. To make all this work, the insurance commissioner would be given sweeping new powers to instruct companies to reduce excessive premiums, to reinstate policies unfairly cancelled, etc. The supporters of this initiative have a raft of proposals to improve consumer protection, boost competition and eliminate unfair business practices. So between now and the vote, let's all watch the auto insurance quotes. Insurers might try to increase the rates now so that, when ordered to reduce them in the future, they keep their profits. The unlikely alternative is the insurers reduce premiums to buy off the voters. Even with such a public bribe, the best guess is the voters will see their own self-interest and vote for the cuts.

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