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Rates and competition are inextricably linked. The insurance business in general is less competitive than other comparable businesses because insurance companies are immune from the federal antitrust laws. This insulation from market forces allows insurance companies to charge higher rates than would exist in a free market.

The limited competition between insurance companies allows companies to manipulate markets in ways that would not be tolerated by the customers of other businesses. A typical strategy is to enter a market with low rates and attractive terms on contribution to reserves. Once a group of physicians is insured with the company, the rates are quickly raised. The cost of tail coverage is kept high, trapping these physicians in several years of high premiums. Legitimate companies will be reticent to compete for these physicians if they must offer lower than break-even rates to do so. The result is that the physicians who switched companies for discount rates ultimately pay more for insurance for several years.

Because insurance companies are insulated from market forces, their competitive positions are established through governmental regulation. While insurance is an international business, it is regulated by individual states. A state's authority to control an insurance company's business practices ends at the state's borders. Less populous states do not have the resources to audit and regulate a national insurance company.

These problems are exacerbated for specialty insurance products such as malpractice insurance. These products affect relatively few persons in the state but require special expertise to evaluate. Most state insurance commissions are not capable of regulating malpractice insurance companies properly. In some cases, this results in discriminatory pricing and unreasonably high premiums. In others, the regulatory commission holds rates to artificially low levels, benefiting physicians in the short term but inevitably resulting in a crisis in the availability of coverage.

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