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.

The meltdown of credit markets has led to calls for increased regulation of the financial services sector including the insurance industry.  With estimates that losses will approach the $1 trillion mark, which some feel is still too conservative, it provides a powerful weapon for Congress to force change onto the system.

The battles lines are being drawn as states fight the attempt to impose federal oversight of what has been their regulatory domain for over a century.

“The state-based regulatory regime has been very effective for more than 150 years,” Dinallo said. “Insurance oversight has been rigorous, resulting in high regulatory compliance and avoiding the level of insolvencies and market meltdowns we have seen in other sectors of the U.S. financial community. Indeed, our national solvency system has ensured that companies have the wherewithal to pay claims while remaining competitive and profitable.”

While the insurance industry has had some setbacks during this financial crisis, it is faring much better than commercial banks and securities firms, both of which are currently regulated at the federal level.

Much of the blame for the current credit crisis can be laid at the feet of the federal government, which has been deregulating the financial services sector for years.  It was under their watch that the current financial troubles came about.  In fact, the largely unregulated $500 trillion derivatives market still remains a “Sword of Damocles” hanging over the entire financial sector. 

Would the federal government do a better job this time with insurance?  I’m not so sure that shifting regulatory control out state’s hands would be in the best interest to consumers.  While the current system of state regulation may be highly inefficient, I would not call it under regulated by any means.