Consumers fare better under state regulatory systems requiring prior approval of insurers' rates than systems with fewer regulatory controls, according a national study released today by the Consumer Federation of America (CFA).

Critics, including insurance industry representatives, questioned CFA's methodology and policy recommendations.

"It is very clear that consumers fare best under a system of prior approval of insurance rates," said J. Robert Hunter, CFA's director of insurance. "Not only are rate changes held down, but competition is not dampened and profits are reasonable for the insurers."

In the study, CFA examined the regulatory structure of all 50 states and the District of Columbia. It then looked into factors such as rate increases from 1989 through 2005; insurer profits from 1997 through 2005, measured by return on net worth; and the current level of competition.

The study concluded that prior approval states had smaller increases in rates from 1989 to 2005, and that the weaker the regulatory system in a given state, the greater the price increase.

It also found that prior approval states had "a similar level of competition and slightly lower insurer profits compared to states with different forms of regulation."

CFA singled out California as having the best consumer protections in place, and for performing "well in virtually every category examined by the report..."

Among its recommendations to lawmakers, CFA said that states should implement regulatory changes modeled after California's Proposition 103, which, among other reforms, changed the state to a prior approval system and outlined specific factors that insurers could use in determining auto rates.

CFA said that Proposition 103 has "established a 20-year track record of success for California consumers."

CFA also recommended that the National Association of Insurance Commissioners (NAIC) reject insurer proposals to deregulate auto insurance, and that Congress reject the idea of an optional federal charter.

"Granting insurance companies the right to choose whether they are regulated at the state or federal level will lead to 'competition' between regulators to lower consumer protection standards," CFA said.

The Competitive Enterprise Institute (CEI), which last month released its own report ranking the insurance environment in all 50 states, issued a statement criticizing CFA's methodology.

CEI describes itself as a "nonprofit, nonpartisan public policy group dedicated to the principles of free enterprise and limited government."

Eli Lehrer, CEI senior fellow, said, "CFA wants to replicate California's broken automobile insurance system all over the country. Apparently, CFA has overlooked the fact that California drivers pay some of the highest insurance rates in the country."

"Consumers in states that do not regulate rates--states like Illinois--actually pay less, on average, for insurance than consumers in California."

In a statement, David Sampson, CEO and president of the Property Casualty Insurers Association of America (PCI), also criticized CFA's conclusions, stating that the report "misses the critical point that the most significant factor in determining auto insurance premiums is the cost of paying for injuries and damage resulting from accidents."

He added, "Experience has shown that a competitive market is more responsive to the demands of almost every consumer. Competition forces insurers to eliminate inefficiencies and stimulates companies' efforts to attract and retain customers, offering innovative products that provide greater value to consumers."

Regarding California's insurance market, Mr. Sampson said, "California auto rates have increased at a slower rate than other states not because of the regulatory constraints of Proposition 103, but because the California Legislature, insurers, auto manufacturers and courts have taken strong action to hold down the cost of accidents, injuries and litigation."

He cited examples including the state's crackdown on fraud, reversing a court ruling that "allowed excessive lawsuits" and reforming the state's assigned risk plan.