The Competitive Enterprise Institute has two proposals for insurance reform. The current system is that insurance companies are regulated by state governments, not by the central government; and people cannot buy insurance from insurance companies which are not in their home state. One proposal is to allow citizens of any american state to buy insurance from any insurance company in any other state. The other proposal is to allow the central government to charter and regulate insurance companies, and to make these federal insurance companies exempt from state laws. See http://www.cei.org/node/20287, or go to the Competitive Enterprise Institute web site and search for insurance.

Also see The Single-License Solution; by Henry N. Butler and Larry E. Ribstein; Regulation magazine, a publication of the Cato Institute; winter 2008-2009; volume 31, number 4; pages 36-42.

Both of these proposals are bad competitive federalism because they would limit the power of state governments to regulate insurance, and thus would deny people the opportunity to choose to live in a society which regulates insurance in some specific manner. The basic principle of competitive federalism is that people should to be allowed to try to create any kind of society they want. If there are some people who want to live in a society where insurance companies are strongly regulated, then they should be allowed to try to create such a society. But they cannot create such a society unless their government has the power to purge their society of outside insurance companies.

Bundling is when a business sells two or more things together, and is reluctant to sell one thing without the other. For example, cars are sold with engines. Computers are sold with operating systems, and the operating system includes many programs. Cable television services sell channels in bundles.

When a state or competing government bans outside insurance companies, the government is bundling insurance regulation with the other services provided by the government. The insurance reforms proposed by CEI are the equivalent of prohibiting state governments from bundling insurance regulation with other services. Yet in debates about cable television and computer operating systems, CEI has said they oppose any restrictions on bundling.

If the central government attempts to impose insurance competition on the competing governments, the competing governments have many opportunities to sabotage the centrally mandated competition. For example, a competing government could pass a privacy law which forbids hospitals from providing any patient information, including billing information, to outside parties. This would make it illegal for hospitals to submit bills to outside insurance companies, so hospitals would have to refuse outside insurance, so no one would buy outside insurance.

Insurance relies on information, and the information is under the control of the competing governments. Competing governments can block outside insurance companies by denying outside insurance companies access to information. Car accident insurance is based on accident reports prepared by the police, and the competing governments control the police. Home fire insurance is based on cause of fire reports prepared by the local fire departments, and the local fire departments are controlled by the competing governments.

If the outside insurance companies try to collect information independently, these efforts will be subject to the laws of the competing governments, and might require a license, which the competing governments might refuse to give. For example, suppose a citizen buys home fire insurance from an outside insurance company. How does the outside insurance company handle a claim? If the local fire department provides no information, how does the outside insurance company know how much damage the fire did, or if the fire occurred at all? The outside insurance company could require the homeowner to obtain a copy of the fire report and submit the report to the insurance company. But some criminals might create a fake fire report. To be sure the fire report is genuine, the insurance company must ask the fire department to verify the report. If the fire department refuses, the insurance company will be unable to protect itself from fraud. Or the insurance company could send a claims adjuster to look at the burned house and determine how much damage the fire did. But the claims adjuster must go to the site of the fire, which means the claims adjuster must be physically present within the jurisdiction of the competing government, which means the claims adjuster must comply with all laws of the competing government. If the competing government forbids the provision of information to outside parties because that would be a violation of privacy, then it will be illegal for the claims adjuster to make a report on the fire. Or the competing government could require that anyone making reports on fires must be certified and licensed.

If the central government wants to force the competing governments to allow competition with outside insurance companies, the central government must prevent the competing governments from sabotaging insurance competition. To prevent competing governments from sabotaging insurance competition, the central government must interfere in everything the competing governments do. If the central government interferes in everything the competing governments do, then the central government has effectively taken over the competing governments. If the central government takes over the competing governments, then the competing governments are no longer free to compete with each other.

For competitive federalism to work, insurance companies, insurance customers, insurance workers, and insurance investors must all have a reasonable opportunity to choose which competing government regulates the insurance company. If the central government requires competing governments to accept insurance companies based in the jurisdictions of other competing governments, then insurance companies would have an unfair advantage in choosing the regulator. The choice of regulator is more important to the insurance company than to the insurance customer, so the insurance company has a greater incentive to make a careful, well informed choice. The insurance company only chooses a regulator once, and this choice affects everything the insurance company does. The customer chooses a regulator every time the customer buys insurance, and this affects only a small part of the customer's life.

On the other hand, if competing governments are allowed to exclude outside insurance companies, then the customer only chooses a regulator once, when the customer chooses which competing government to live under. This choice affects every part of the customer's life. In this case, the customer is likely to make more effort to be well informed, and is likely to make a better choice. The insurance company also has a reasonable opportunity to decide whether or not to do business under that competing government. So both the customer and the insurance company have an equal opportunity to choose the regulator, which is good.

Some people say the central government needs to force competing governments to allow insurance competition because the american state governments have formed a cartel to suppress competition. But it is easier to establish a cartel of a few large businesses than a cartel of many small businesses. A cartel of many small businesses is unstable and tends to disintegrate quickly. In other words, it is not possible to establish a cartel to suppress competition unless competition is already suppressed. The fact that the american state governments are able to establish and maintain an insurance cartel shows that there is not enough competition between state governments. In order to increase competition between state governments, there needs to be less control of state governments by the federal government. If the federal government allowed the victims of the insurance cartel to secede and form new states, the new state governments would destroy the cartel without further intervention by the central government.

If people were free to create new competing governments, there would be thousands of competing governments. If each competing government had different insurance regulations, there would be thousands of different schemes for regulating insurance companies. I think the best solution is for there to be several competing insurance regulation cartels. This would allow there to be thousands of different competing governments, but not thousands of different regulatory schemes. Therefore I do not think the central government should prohibit competing governments from forming cartels.

If competing governments are misregulating insurance, then the best solution is to increase competition between competing governments, especially by reducing the barriers to entry by making it easier for people to create new competing governments. If a competing government is conspiring with local insurance companies to exploit the people, then the central government should allow the exploited people to secede and form a new competing government which protects them from exploitation.