Insurance price caps sound like a good idea. But are they?

Nearly every U.S. state bans insurance companies from implementing excessive rate increases on home and car coverage. Even with those protections, the average cost of auto insurance has risen far faster than general inflation in the last five years — and some state regulators fear homeowners insurance could soon do the same.

The concern has prompted some lawmakers to consider implementing price caps on insurance companies. While that may sound like a great idea if you are a cash-strapped motorist and homeowner, these regulations can backfire. Find out why and how you can protect your access to home and car insurance going forward.

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Each state defines how it regulates insurance rates. Some require insurance companies to obtain approval before raising their rates, some allow limited rate increases without approval, and others greenlight higher rates as long as they are reported. Illinois is the only state with no rating law.

Most states specify that rate increases cannot be “excessive, inadequate, or unfairly discriminatory,” according to the National Association of Insurance Commissioners.

Learn more: Car insurance rates are climbing. Here are 4 reasons why and 11 ways to save.

Still, insurance costs in disaster-prone areas have skyrocketed. According to Michael Coffey, founding partner and insurance defense litigator at Coffey Modica LLP, homeowners insurance costs in some areas of Florida have increased 30%, while premiums in Illinois are up 50% over the last three years. In California, Coffey continues, industry analysts expect a 21% rate increase after the Los Angeles wildfires last January.

Learn more: Homeowners insurance costs just hit a new high. It’s scaring off some buyers.

Regulators in Illinois, Louisiana, Michigan, and New York are exploring price caps as a way to protect residents from rising insurance costs. “State governments are feeling pressure to act from voters who feel abandoned and vulnerable,” explained Max Dugan-Knight, climate data scientist at Deep Sky Research.

• Illinois: Lawmakers have proposed The Insurance Rate Fairness and Consumer Protection Law, or SB0268, which requires insurers to request approval to raise rates on homeowners and car insurance.

• Louisiana: Louisiana recently passed House Bill 148, allowing the state insurance commissioner to block any excessive rate increase.

• Michigan: Michigan regulators are reviewing two bills governing insurance rates, SB 328 and SB 329. SB 328 would require insurance companies to reduce auto premiums by 10% or more at the first renewal. SB 329 would eliminate reinstatement fees and ban price increases related to coverage gaps.

• New York: A group of lawmakers announced an investigation into property insurance premium increases in August. The goal is to identify potential regulatory changes for the state.

Learn more: Cheapest car insurance in New York

The case for limiting insurers’ ability to raise rates is straightforward: The added regulatory oversight can keep prices affordable for ordinary Americans who are struggling with the ever-increasing rates, according to Coffey. Dugan-Knight added that price caps can “offer some short-term relief from otherwise soaring insurance premiums.”

Learn more: Homeowners insurance: What it covers and how much you’ll pay

Longer-term, price caps can reduce competition and limit access to insurance. Dugan-Knight characterized the regulation as a “band-aid solution” because it doesn’t address “a fundamental problem of growing risk.” As Coffey said, “insurers must be able to assess risk and set rates without artificial restraints on the market.”

If they can’t, they could simply stop doing business in the state. “Insurance companies will pull out of states where they can’t charge premiums that keep them solvent,” explained Clearsurance.com insurance and finance expert Melanie Musson.

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The trend is already happening in higher-risk states even without legislative changes. According to an Insurance.com survey, more than 15% of homeowners in California, Florida, New York, and Georgia reported receiving policy cancellations because their insurance company left the state.

Stiffer restrictions on insurance rates could expedite these state departures. In turn, higher-risk customers may have more trouble finding insurance across a smaller pool of providers.

Learn more: Cheapest car insurance in California

In this tricky insurance environment, keeping your risk level low is essential. The lower your risk, the cheaper you are to insure. That helps you retain access to coverage even if the pool of insurers in your state shrinks.

As a homeowner, you can manage your risk profile by preventing damage and filing fewer claims. Franklin Manchester, principal global insurance advisor at SAS recommends these moves to safeguard your home:

1. Leak detection: Install a leak detection system to identify water leaks early.

2. Electrical fire detection: A system that monitors your home for electrical faults can protect against wiring-related fires.

3. Brush removal: Keeping the area around your home free from brush can head off fire damage.

4. Roof and window inspections: Monitoring the condition of your roof and windows can prevent water leaks, which can cause water damage, mold growth, wood rot, and electrical damage.

5. Replacement hoses for the washing machine: Manchester says this upgrade can mitigate damage from a claim and may earn you a discount on your policy.

Learn more: What does homeowners insurance cover?

You can apply the same concept to your car insurance. Try these strategies to file fewer claims.

1. Safe driving: Conservative driving habits can help minimize tickets and accidents.

2. Seat belts: Limit injuries by wearing a seat belt when you drive, without exception.

3. Garage parking: Locked and covered garage parking can minimize weather damage and prevent vandalism.

4. Anti-theft device.:A car alarm or steering wheel lock can prevent theft.

5. Safe distance: Maintaining a healthy distance between you and the car in front of you can help prevent rear-end collisions and chipped windshields.

6. Routine inspections: Keeping your car inspected and maintained reduces your accident and claim risk.

By following these best practices for your home and car, you can limit your claims risk, protect your access to insurance, and — hopefully — qualify for the lowest rates.

Learn more: Cheapest car insurance after one at-fault accident

Is mandated car insurance reduction real?

Michigan regulators are evaluating a proposal that would require insurance companies to reduce rates at the customer’s first renewal.

A report from the Consumer Federation of America estimates that the cost of homeowners insurance has increased 24% over the past three years. That equates to 8% per year, but your experience could be different depending on where you live and other factors.

There is no federal cap on insurance increases. States regulate insurance companies. Most require insurance companies to report rate changes and can block excessive increases.

Homeowners insurance rates have been rising due to higher natural disaster risk, inflation, and higher building costs. Factors related to your qualifications may have also contributed. Your rates can rise if you or your neighbors filed more claims, you added onto your home or property, or your credit score declined.

Tim Manni edited this article.