In a sign that the credit crisis maybe nearing an end, the financial services sector including the insurance industry is beginning to heat up with merger and buyout activity.  The insurance industry has faired better than their counterparts in the commercial banking and securities brokerage sectors, amidst the fallout of the sub prime collapse.

Insurance companies have taken their fair share of lumps and losses will eventually eclipse what was paid out for Hurricane Katrina.  For the most part it was in isolated pockets like bond insurance that chose to deal directly with mortgage backed securities.  However, the underlying nature of much of the industry has let it avoid most of the shortsightedness of the rest of the finance world.

Due to the type of financial products insurance companies sell, they must be much more risk adverse, which has served them well in a faltering economy.  The must also maintain much stronger capital positions in order to meet claims obligations, thus they have large cash reserves on hand and haven’t been affected as much by the credit crunch.

A growing concern for the future is the drop in investment income that makes up the bulk of the profits for the industry.  Though with stocks prices depressed, companies that have weathered this storm the best are out looking for deals.

As is with life, the strong will survive while the weak will get gobbled up by their larger brethren.

Last week a California Superior Court denied Allstate’s appeal on an auto insurance rate reduction ordered by the state’s insurance regulater.

“The court rejected Allstate’s efforts to delay immediate savings to consumers,” said state Insurance Commissioner Steve Poizner in a news release. The insurer sought a delay from the court while it appeals a state decision “that Allstate’s existing passenger automobile rates are 15.9 percent in excess of what the law permits”

Allstate, which is the fifth largest auto insurer in the state was disappointed with the court’s ruling and released this statement.

“Allstate wants to lower its auto rates and reduce the cost of auto insurance in California, especially during difficult economic times for our customers,” said spokesman Peter DeMarco in a news release. “However, the proposed auto rate reduction Allstate is being asked to take is neither fair nor reasonable. We are reviewing the details of the Court’s ruling and will continue to explore our options going forward.

California’s auto insurance regulatory structure requires state approval before any rate changes can be implemented.  California was cited as glowing example, in a study released last week by the Consumer Federation of America, which claimed that states which used prior approval for auto insurance rates had premiums rise more slowly over a sixteen year period.

The state ordered rate reduction is expected to save California drivers an average of $124 annually per vehicle.

Much attention has been in the news recently as Congress focuses on the topic of federal regulation for the insurance market.  Currently states are in charge of regulation with different degrees of oversight, especially in the auto insurance market.

Yesterday, the Consumer Federation of America(CFA) released a national study on auto insurance regulation and it’s effect on premiums.  It claims that consumers fair better in states that use pre-approval for rates and that premiums rose more slowly over the sixteen year study.

“It is very clear that consumers fare best under a system of prior approval of insurance rates. Not only are rate changes held down, but competition is not dampened and profits are reasonable for the insurers,” said J. Robert Hunter, CFA’s director of Insurance and a former federal and state insurance regulator. It is also clear that as regulation is weakened, insurance consumers are worse off, he said.

The insurance industry has refuted these claims by the CFA with the National Association of Mutual Insurance Companies(NAMIC) releasing this statement.

We hold exactly the opposite view than the CFA as there is a large body of rigorous, independent research that arrives at the opposite conclusion , said Neil Alldredge, vice president-state and regulatory affairs.  Prior approval laws, such as those found in California and New York, harm consumers by keeping rates high and discouraging competition.

So, who is right?  Unfortunately, it’s not that simple, every state will have different demographics and varying degrees of the relative wealth of it’s residents.  That’s why you see such a wide range of premiums across the country.

Massachusetts for example has some of the highest auto insurance premiums in the country but it would be unfair to say that it was due solely to it’s regulatory structure.  It’s residents are comparatively wealthy compared to much of the country and are more likely to own more expensive vehicles than residents living in a relatively rural state.

It’s used to have the country’s strictest regulatory structure, in which the state set the rate auto insurers could charge but it recently changed to an open competition system.  In a year from now, it may give concrete evidence to one side or the other but currently it’s still too early to judge it’s effects on premiums.