8-What Do We Really Believe?

Government regulation of prices allows customers to enjoy lower prices… In theory. In practice, regulation increases supplier costs and reduces supply, even in the face of increasing demand. Over the long-term, prices either meet supplier costs or suppliers withdraw. In any case, customers as a group face more limited choice. Here is the story of two government initiatives to reduce prices for consumers.

Posted 3/31/08

There were two items of interest in recent press reports. Both suggest something about our fundamental beliefs in our economic system.

The first instance occurred in California. The State Insurance Commissioner asked Allstate to reduce its automobile rates in the state by nearly 16%. Allstate insures about 10% of California automobiles. The owners of these automobiles will save about $124 per car. The reductions came because the state concluded that the companies were charging too much for their services.

In a separate event, the State of Arkansas ordered sixty companies who offer payday-lending services to close down immediately. These payday lenders advance money to a borrower to bridge the period between paydays. The lenders charge a fee, plus interest. The State of Arkansas concluded that this service violated a constitutional requirement that bars lenders from charging an annual interest rate higher than 17%.

Both of these stories are examples of a lack of belief in the effectiveness of a capitalist system. There is no indication in either case that new entrants are barred from entering the market. If the automobile insurance companies charge too much, their profits will be unusually high. New companies will enter the California market with a promise of lower prices to attract their customer sales volume. The same would hold true with payday lenders in Arkansas. If California and Arkansas believed in the effectiveness of capitalism, they would simply wait until the new entrants reduced the prices in the state. They apparently do not believe that capitalism works.

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Update 9/26

The regulation of these two markets has taken them in dramatically different directions. As of 2021, State Farm led California auto with 13.7% market share and Allstate had fallen to fourth at 9% — the picture has moved again since. California’s auto insurance market is now roughly at the national average on price.  It rose more slowly than the country as a whole through 2023, then began catching up in 2025–26 as regulators cleared a backlog of filings. The real driver was a regulatory freeze: from the start of the pandemic until the fourth quarter of 2022 — roughly two and a half years — California’s Insurance Commissioner approved no personal auto rate increases at all. That freeze, not wildfire risk or general inflation, is the direct mechanism behind what several top-ten carriers did next.

GEICO closed every physical and phone sales office in the state and moved to online-only, telling the market plainly that it was “basically being forced to sell policies at a loss” because the Department of Insurance would not approve a rate increase; it posted a $1.9 billion underwriting loss in 2022.

Others followed a similar path. Progressive stopped advertising in California and pulled back sharply through 2022–23. Liberty Mutual is reported to have exited California auto over the same period, and Allstate reduced its exposure alongside its better-known homeowners retreat. None of this was a full exit on the scale of the homeowners story below — these were reductions in exposure, not a stop to all new business — but the mechanism is the same one this blog has argued from the start: a company stays in a market as long as its price lets it make a cash contribution on its activities there; once it can no longer make that cash contribution, it withdraws rather than keep paying cash to stay. Withdrawal, partial or complete, is itself the evidence that the cash contribution had turned negative.

Once approvals resumed in late 2022, supply came back with them: GEICO and State Farm were among the first carriers to win increases, Progressive re-accelerated and passed State Farm in 2025–26 to become the largest auto insurer in the country for the first time since 1942, and State Farm — its book now profitable — won approval for a 6.2% rate cut effective May 2026. Regulation eased, and the companies that had pulled back returned. Separately, Senate Bill 1107 raised California’s minimum liability limits from 15/30/5 to 30/60/15, effective January 1, 2025 — doubling the bodily-injury minimum and tripling the property-damage minimum. That is a distinct driver of higher premiums, and it should not be credited to the rate freeze. Auto insurance pricing is not under government pressure today.

The payday lending industry has had a significantly different outcome the last 10 years. The industry has come under intense regulatory pressure. National single-payment payday volume fell 45% from 2013 to 2019, then dropped as much as 60% further in 2020. Some of the sales have shifted online, but overall volumes for the industry are in sharp decline. As a result, the industry is consolidating around several major companies where once there were hundreds of competitors. The State of Arkansas has been particularly difficult on the payday lending industry. The state enforced a constitutional interest-rate cap of 17% — already on the books, not a new restriction — through Attorney General action and a 2008 state Supreme Court ruling striking down the Check Cashers Act. At 17% APR, a $400, two-week loan yields about $2.61 in interest: nowhere near enough to make a cash contribution on the cost of running a storefront, a direct case of the same principle at work — price that cannot support a cash contribution empties a market of suppliers. Where once there were 275 payday storefronts in the state (2006), enforcement brought that to 136 by mid-2008 and 80 by the end of 2008, and today there is not a single storefront survivor — though online lending, harder for regulators to reach, remains a separate channel. The erstwhile customers for this industry in Arkansas must look elsewhere for a short-term borrowing solution. Are they better off?

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A Closing Thought: California Homeowners

California homeowners insurance is the sharper version of the same story, and it deserves its own word. Allstate said outright that the cost of insuring new California customers exceeded what regulation let it charge — citing wildfire risk, reinsurance costs, and its inability to adjust prices quickly under Proposition 103 — and it withdrew. State Farm General reported $5.3 billion in cumulative underwriting losses from 2016 to 2024 (Consumer Watchdog disputes this, arguing the direct homeowners book was itself profitable and that the losses sat in commercial and liability lines). Whichever accounting is right, the result is not in dispute. Customers suffered.  FAIR Plan policies grew 157% since September 2022 to nearly 700,000 by mid-2026, with total exposure up 250% to $768 billion. FAIR Plan premiums run roughly double the private-market average, for fire/smoke/lightning/explosion coverage only — a normal homeowners policy’s other perils require a separate DIC policy on top. Customers pay more for less coverage.

Regulators just approved another 29.1% FAIR Plan rate increase, effective October 2026. Prop 103 is the reason: it is the one thing Allstate itself named as central to its decision, and insurers are only beginning to return now that the state’s new Sustainable Insurance Strategy lets them price for reinsurance and catastrophe risk going forward. The test throughout this update is the same one: a company stays as long as it can make a cash contribution on its sales; once it can’t, it withdraws rather than keep paying cash to stay. Some homeowners insurers hit that line and left; auto insurers came close to it and pulled back short of it; both came back once regulation let price catch up to cost.

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Quick Hits

Four patterns from the StrategyStreet system this story confirms.

1. A company stays in a market as long as it can make a cash contribution on its sales there; once it can’t, it withdraws rather than keep paying cash to stay. GEICO said as much in its own words about California auto, and Allstate said the same about California homeowners — both pulled back exactly when regulation held price below the level needed for a positive cash contribution, and both, or their peers, returned once price caught up.
2. A regulator that freezes price is running a capacity experiment on product availability, whether it means to or not: hold price below cost long enough and supply thins, restore the price and supply comes back. California’s own auto and homeowners markets ran that experiment twice in the same decade, with the same result each time — GEICO, Progressive, Liberty Mutual and Allstate all pulled back auto exposure during the pandemic-era rate freeze and eased off once approvals resumed.
3. Regulation aimed at protecting price-sensitive customers routinely pushes the cost onto whoever is left. Arkansas capped payday rates at 17% and eliminated the storefront industry outright; its former customers didn’t get a cheaper loan, they got the traditional bank fees. The theme holds: regulation reduces availability and raises price for everyone not shielded from it — including the very customers it meant to protect.
4. Competitors facing the same regulatory shock don’t respond identically. GEICO went furthest — closing every physical and phone office and moving online-only — while State Farm kept writing new California auto business throughout, even while absorbing large underwriting losses. Same freeze, same state, different competitive choices.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.