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 goal in mind, the R Street Institute’s Annual Insurance Regulation Report Card aims to take an objective look at how each state’s Department of Insurance fares with respect to overseeing the “business of insurance”. Since 2012, R.J. Lehmann Director, Finance, Insurance & Trade; Resident Senior Fellow has written the report published by R Street, the non-profit, non-partisan public policy research organization.
Now in its eighth edition, the 2019 Report Card “grades” each state by beginning with 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?
After asking these fundamental questions, then each state insurance department is measured via seven different criteria using the latest data available in order 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.”
Mr. Lehmann cautions in the report that the report card should not be seen as an indictment against certain states or their Commissioners.:
Highlights from the 2019 report
For the sixth straight year, 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, which earned an “F, for the second year in a row as the state with the worst insurance regulatory environment.
As for the state which saw the biggest improvements they included Florida (from a B to an A-), Montana (from a D to a C-) and New Mexico (from a B- to a B+). The biggest declines were seen in Colorado (from a C to a D+), Maine (from an A- to a B) and Oregon (from a B to a C+).
In 2019, we saw progress toward more competitive insurance markets. Residual property insurance mechanisms continued to shrink. Florida enacted landmark reform of its assignment-of-benefits system and Michigan finally ended its mandate that all personal injury protection policies must provide unlimited lifetime medical benefits, which had driven out-of-control costs for decades.”R.J. Lehmann
How Massachusetts & its neighbors fared this year
While Vermont was at the head of the class once again this year, Massachusetts and the rest of its neighbors throughout New England did not fare as well.
For those interested in a recap of Masan 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.
Since more and more of our readers hail from all over the Commonwealth and New England, this year we look at each of the six states that make up New England:
|1||Vermont||A+||76.7||Ahead on financial exams, small residual markets|
|14||New Hampshire||B+||67.6||Low politicization, competitive auto market, competitive homeowners market, small residual markets.||Large runoff obligations, thinly capitalized markets, excess auto profits, territorial restrictions.|
|18||Maine||B||65.8||Low politicization, competitive auto market, competitive homeowners market.||Excess auto profits, excess homeowners profits, large workers’ comp state fund, desk drawer rules.|
|19||Connecticut||B||65.7||Low tax and fee burden, competitive auto market, competitive homeowners market, small residual markets.||Large regulatory surplus, territorial restrictions.|
|26||Rhode Island||C+||61.3||No runoff obligations, well-capitalized markets, competitive auto market, small residual markets.||Large regulatory surplus, very high homeowners ratio, territorial restrictions.|
|47||Massachusetts||D||48.4||Competitive homeowners market.||Large regulatory surplus, large auto residual market, large homeowners residual market, credit scoring restrictions|
More about the R Street’s grades for Massachusetts and the rest of New England
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 to gain a little more insight into the R Street’s grading process with respect to Massachusetts and its neighbors in New England. Here is what he had to say:
As it did last year, Massachusetts again faired pretty poorly in our report card, with the fourth-worst overall regulatory environment in the country. In contrast with the Bay State’s D, Vermont had the best overall regulatory environment in the country, with an A+. New Hampshire performed pretty well, with a B+, Maine and Connecticut both scored B’s and Rhode Island was a bit behind with a C+.
A notable area where Massachusetts always performs poorly is in the measure of fiscal efficiency. In particular, the commonwealth gets bad marks on a metric we call “regulatory surplus.” Massachusetts collected $179.6 million in regulatory fees and assessments from insurance companies last year, but spent just $14.4 million of that total on insurance regulation. The rest is, in effect, a stealth tax on insurance consumers to cover other budgetary shortfalls.
Connecticut also had a fairly large regulatory surplus, collecting $139.2 million in fees and assessments, but spending just $27.1 million of that on insurance regulation. Vermont, Maine and New Hampshire all had more modest surpluses, while Rhode Island had not surplus at all.
Massachusetts and, to only a slightly lesser extent, Rhode Island also earned demerits due to their large residual markets for home and auto insurance. In auto insurance, Massachusetts and Rhode Island placed second and third, respectively, in the market share held by their insurers-of-last-resort, behind only North Carolina. Where North Carolina’s residual market accounted for 14.8 percent of its auto insurance market, it was 4.8 percent in Massachusetts and 2.4 percent in Rhode Island. The other New England states all had very small residual auto insurance markets, ranging from 0.01 percent in Connecticut to 0.13 percent in New Hampshire.
Massachusetts also had the second-largest residual market for property insurance, again behind only North Carolina. The Massachusetts Property Insurance Underwriting Association had 6.5 percent of the market last year. At 3.5 percent of the market, the Rhode Island Joint Reinsurance Association was the fifth-largest property insurance residual market. Connecticut’s residual property insurance market had market share of just 0.2 percent, while Maine, New Hampshire and Vermont have no residual markets in property insurance.
One other area where Massachusetts scored poorly is in the realm of underwriting freedom. In addition to completely banning the use of credit as a rate-setting or underwriting variable, Massachusetts employs stringent “prior approval” regulation for rate-filings in auto insurance and workers’ compensation. In homeowners, medical malpractice and commercial lines, Massachusetts has somewhat more liberal “file-and-use” procedures.
Maine employs file-and-use across the board, while Connecticut is file-and-use, except in medical malpractice and New Hampshire is file-and-use except in workers’ comp. In both cases, the states employ prior approval systems for the exceptions.
Vermont also employs a prior approval system for workers’ comp, but for every other line of business, it employs much more liberal “use and file” systems, in which an insurer is permitted to begin using a rate even before it has been filed.
The Top 10 best and worst states for insurance regulation according to R Street
In addition to learning about the grades for Massachusetts as well as the rest of the New England states, Agency Checklists thought our readers would be interested in knowing what other states were ranked as the “top” students this year. Here are the ten states this year that R Street says are doing it right as well the ten who are not:
|Top 10 Best Grades||Top 10 Worst Grades|
|Vermont “A+”||Colorado “D+”|
|Virginia “A”||Hawaii “D+”|
|Kentucky “A”||North Dakota “D”|
|Indiana “A”||Minnesota “D”|
|Arizona “A-”||California “D”|
|Nevada “A-”||Arkansas “D”|
|Florida “A-”||Massachusetts “D”|
|Utah “A-”||North Carolina “D”|
|Wisconsin “A-”||New York “D-”|
|Illinois “B+”||Louisiana “F”|
How to view the entire Report Card
For those interested in reviewing the R Street Insurance Regulation Report Card in its entirely, it can be accessed on the R Street website via this link.