A Move In The Right Direction For Massachusetts On The 2018 Insurance Regulation Report Card

An annual examination of insurance regulation by state

Insurance, unlike the banking and securities industries, 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 in mind, the goal of the R Street Institute’s Annual Insurance Regulation Report Card is to take an objective look at how each state’s Department of Insurance is faring concerning overseeing the “business of insurance” within its borders. Since 2012, the annual results of this review have been published in the non-profit, non-partisan public policy research organization’s annual Insurance Regulation Report Card.

In its seventh edition, the 2018 Report Card again reviews and “grades” each state by asking three fundamental questions:

• 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 and foster competitive, private insurance markets?

This is accomplished by measuring a state’s insurance department via seven different dimensions, to determine how effective and efficient each state is in the discharge of their duties with respect to insurance.

• 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.

Ultimately, as stated in the annual report, 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 mantra of “Free Markets. Real Solutions.”  Or, as R Street Senior Fellow, Editor-in-Chief and Co-Founder, R.J. Lehmann, expands emphasizes each year in the report:

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 done in the past, 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.

Highlights from the overall 2018 report

For the fifth straight year in a row, our neighbor to the North, Vermont, topped the list with an A+, meaning that R Street deemed it the best insurance regulatory environment in the United States. Coming at the bottom of the same list was Louisiana, with an “F,” the worst score in the country, narrowly edging out second-to-worst New York. According to the Report Card, the biggest grade improvements in 2018 were two other Massachusetts New England neighbors, Connecticut (from a C+ to a B) and New Hampshire (from a B- to a B+), along with Delaware (from an F to a C). As for the biggest decline in grades, they were seen in the states of South Carolina and Ohio (both from a B to a C).

In 2018, we saw progress toward more competitive insurance markets. Residual property insurance mechanisms continued to shrink. Several states, notably Missouri, moved to loosen systems for filing rates and forms in the commercial insurance space. On the other side of the ledger, Illinois—long among the most free-market insurance environments in the nation—introduced stringent controls on its workers’ compensation market after overturning Gov. Bruce Rauner’s veto.”

Now more on Massachusetts’ marks this year…

As the saying goes, “… There is no way to go but up” could aptly sum up Massachusetts’ improvement in the annual R Street Institute’s Insurance Regulation Report Card this year. While Vermont, once again received top marks in 2018, as it did in the five previous consecutive years before as well, Massachusetts’ mark in 2018 has tended to oscillate on the opposite end of the spectrum. This year has seen another marked improvement to a “D” from an “F.” In comparison, in 2016, Massachusetts scored a “D-.” Overall, this year marks a reversal of the three-year downward trend from the Commonwealth’s highest grade of “C” in 2015.

To recap: In 2013, the Commonwealth received a “C-,” then dropped to a “D” in 2014/ Rallying in 2015, 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-,” followed by an “F” in 2017.

The following capsule report highlights the metrics behind the report’s reasoning on why Massachusetts received a “D” 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 particularly with respect to credit-scoring restrictions.

More about the R Street’s Massachusetts Grade

As anyone who has gone to school would likely agree, it is sometimes hard to know why you are given a certain grade. Oftentimes, the best way to improve is 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 has improved from an F grade in last year’s report to a D this year. That’s still not great, but it does show progress, as the state’s residual auto insurance market — still one of the largest in the nation — continues to shrink thanks to liberalizing reforms a decade ago. It likely would shrink even further if the Bay State were to follow others in allowing insurers to consider credit information, which had been demonstrated to be an actuarially credible variable, in underwriting and rate-setting.

While Massachusetts does also still have a relatively residual market for homeowners insurance, that market is otherwise the most competitive in the nation. A large number of homeowners insurers compete for business in Massachusetts, all with modest market shares. And the industry’s average loss ratios over the past five years have been right in the middle of the distribution — neither very high, which would suggest rates are being suppressed, nor very low, which would mean excess profits.

Ultimately, the biggest factor in Massachusetts’ poor score is that the commonwealth continues to use insurance regulation as a cash cow. The state levied $174 million in regulatory fees and assessments on the insurance industry in 2017, but spent only $14.6 million on insurance regulation. The difference between those two figures, which we call a “regulatory surplus,” amounts to a stealth tax that ultimately is paid by consumers in the form of higher premiums.

The Top 10 best and worst 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:

For those interested in taking a look at the official report, a copy can be accessed by clicking the link below:

View the R Street’s 2018 Insurance Regulation Report Card