An annual examination of insurance regulation by state
Unlike the banking and securities industries, the insurance marketplace continues to be one of the largest and most significant segments of the financial services industry sectors regulated almost entirely at the state level.
With that said, the R Street Institute, a non-profit, non-partisan public policy research organization, has taken on the job of examining each of the 50 states to determine which ones do the best job in regulating the “business of insurance.” Since 2012, the annual results have been published in R Street’s annual Insurance Regulation Report Card.
Now in its sixth edition, the Insurance Regulation Report Card reviews and “grades” each state, via seven different dimensions, to determine how effective and efficient each state is in the discharge of their duties with respect to insurance.
The underlying belief behind the Insurance Regulation Report Card, is to determine which state regulatory systems best embody the principles of a limited and efficient government, embodying R Street’s own mantra of “Free Markets. Real Solutions”. R Street Senior Fellow, Editor-in-Chief and Co-Founder, R.J. Lehmann, expands on that notion in the report explaining that:
We believe states should regulate only those market activities where government is best-positioned to act; that they should do so competently and with measurable results; and that their activities should lay the minimum possible financial burden on policyholders, companies and, ultimately, taxpayers.”
Mr. Lehmann cautions, however, in this edition, as he has cautioned in past editions, the report card should not be seen as an indictment against certain states or their commissioners.:
The report is not intended as a referendum on specific regulators. Scoring an “F” does not mean that a state’s insurance commissioner is inadequate, nor is scoring an “A+” an endorsement of those who run the insurance
department. Significant changes in states’ scores most often would only be possible through action by state legislatures. Variables are weighted to provide balance between considering the rules a state adopts and the results it demonstrates, between the effectiveness of regulators in performing their core duties and the efficiency of a state in making use of its resources.
So how does the report actually give grades
The R Street Institute asks the following three basic questions in analyzing a state’s regulation of its insurance industry:
- How free are consumers to choose the insurance products they want?
- How free are insurers to provide the insurance products consumers want?
- How effectively are states discharging their duties to monitor insurer solvency, police fraud and consumer abuse and foster competitive, private insurance markets?
After asking these three questions, the institute then uses the most recent data available in tracking insurance regulation within seven broad categories. These include measuring
- whether states avoid excess politicization;
- how well they monitor insurer solvency;
- how efficiently they spend the insurance taxes and fees they collect;
- how competitive their home and auto insurance markets are;
- how large their residual markets are;
- and the degree to which they permit insurers to adjust rates and employ rating criteria as risks and market conditions demand.
Highlights from the 2017 report
The R Street noted that in 2017, the organization saw progress on one “notable measure” with regards to the competitive insurance markets. More specifically, it was pleased with the continue shrinking of residual property insurance mechanisms. While the Massachusetts residual homeowner’s marketplace was not specifically cited, our readers will note that the MA FAIR Plan has followed this trend as noted in our latest look at the Commissioner’s Annual Home Insurance Report.
In addition to ranking and evaluating the state of insurance regulation throughout the country, the report also includes state-by-state developments over the past year. With respect to Massachusetts, the institute highlighted the following insurance developments for this year’s report:
Massachusetts – Bills introduced in January, H. 554 and S.
533, would prohibit homeowners insurers from considering a
dog’s breed as part of the underwriting and rate-setting processes.
The measures were subject to hearings in October,49
but have yet to move through committee in either chamber.
In November, Gov. Charlie Baker appointed Gary Anderson
to become commissioner of the commonwealth’s Division
of Insurance.50 Anderson had been serving as interim commissioner
since February, when former Insurance Commissioner
Daniel Judson stepped down to become president of
the Workers’ Compensation Rating and Inspection Bureau
Now more on Massachusetts’ marks this year…
While our neighbor to the North, Vermont, once again received top marks in 2017, as it did in 2016 as well, Massachusetts’ mark in 2017 is actually worse than its grade in 2016. This marks a three year downward trend, as 2016 was also a worse grade than the “C” the Commonwealth got in 2015.
To recap: In 2013, the Commonwealth received a “C-“, then dropped to a “D” in 2014, but rallied in 2015, when the Bay State’s grade improved to a solid “C”. The improvement was short-lived, however, as Massachusetts barely earned a passing grade in 2016 with a “D-“. This year, it officially failed, with an “F” for 2017.
The following capsule report explains the report’s reasoning why the Commonwealth “failed” this year.
While R Street cited the state’s competitive home insurance market as a strength, the Commonwealth ultimately was marked down for various factors including a large regulatory surplus, large residual auto and homeowners markets, as well as what the R Street perceives as little underwriting freedom.
More about the R Street’s Massachusetts Grade
As anyone who has gone to school would agree, it is sometimes hard to know why you are given a certain grade. Oftentimes, the best way to improve is often to ask why you were graded the way you were.
To that end, we queried Mr. Lehmann on his views as to why Massachusetts garnered such a low grade for its overall performance. Here is what he wrote us:
Massachusetts once again ranked among the bottom few states in our survey. The state has fairly restrictive underwriting rules, banning the use of credit and proscribing considerations of age and gender. The state has large relatively residual markets in both home and auto.
The auto residual market, though it is still the third-largest in the country, has shrunk enormously since deregulation a decade ago, which is a major bright spot. But the place where the commonwealth continues to be most unusual is in what we call “regulatory surplus” – the proportion by which the regulatory fees and assessments it collects exceed what it spends on regulating insurance.
Massachusetts collected $127.5 million in regulatory fees and assessments in 2016, but spent only $14.7 million on insurance regulation. This is by far the largest spread in the country, and it represents a kind of hidden tax that insurance consumers must bear. “
The Top 10 best states for insurance regulation according to R Street
In addition to learning about Massachusetts, Agency Checklists still thought our readers would be interested in knowing what states were ranked as the “top” students this year. Here are the ten states this year that R Street says are doing it right:
And now the top ten who make up the other end of the list…
On the other end of the list, these ten states were given the lowest marks for their regulation of insurance in addition to the Commonwealth. While Massachusetts is not the worst, it’s close.
New York “D”
North Carolina “F”
For those interested in taking a look at the official report, a copy can be accessed by clicking the link below: