Policy Studies Insurance

2017 Insurance Regulation Report Card

Welcome to the sixth edition of the R Street Institute’s Insurance Regulation Report Card, our annual examination of which states do the best job of regulating the business of insurance.

R Street is dedicated to the mantra: “Free markets. Real solutions.” Toward that end, the approach we apply in this annual survey is to test which state regulatory systems best embody the principles of limited, effective and efficient government. 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, taxpayers and ultimately, consumers.

There are three fundamental questions this report seeks to answer:

  1. How free are consumers to choose the insurance products they want?
  2. How free are insurers to provide the insurance products consumers want?
  3. How effectively are states discharging their duties to monitor insurer solvency and foster competitive, private insurance markets?

The insurance market is both the largest and most significant portion of the financial services industry to be regulated almost entirely at the state level. While state banking and securities regulators largely have been pre-empted by federal law in recent decades, Congress reserved to the states the duty to oversee the “business of insurance” as part of 1945’s McCarran-Ferguson Act.

On balance, we believe states have done an effective job of encouraging competition and, at least since the broad adoption of risk-based capital requirements in the 1990s, of ensuring solvency. As a whole and in most individual states, U.S. personal lines markets are not overly concentrated. Insolvencies are relatively rare and, through the runoff process and guaranty fund protections enacted in nearly every state, generally quite manageable.

However, there are certainly ways in which the thicket of state-by-state regulations leads to inefficiencies, as well as particular state policies that have the effect of discouraging capital formation, stifling competition and concentrating risk. Central among these are rate controls.

While explicit price-and-wage controls largely have fallen by the wayside in most industries (outside of natural monopolies like utilities), pure rate regulation remains commonplace in insurance. Some degree of rating and underwriting regulation persists in nearly every one of the 50 states. To a large degree, this is a relic of an earlier time, when nearly all insurance rates and forms were established collectively by industry-owned rate bureaus, as individual insurers generally were too small to make credible actuarial projections. McCarran-Ferguson charged states with reviewing the rates submitted by these bureaus because of concerns of anticompetitive collusion. With the notable exception of North Carolina, rate bureaus no longer play a central role in most personal lines markets, and many larger insurers now establish rates using their own proprietary formulas, rather than relying on rate bureau recommendations.

In some cases, regulation also may hinder the speed with which new products are brought to market. We believe innovative new products could be more widespread if more states were to free their insurance markets by embracing regulatory modernization. An open and free insurance market maximizes the effectiveness of competition and best serves consumers.

In 2017, we continue to see progress on one notable measure of competitive insurance markets: that residual property insurance mechanisms continue to shrink. Premiums written by the nation’s residual property insurance plans have fallen from $3.39 billion in premium and 3.32 percent of the market in 2011 to $2.06 billion in premium and 1.72 percent of the market in 2016. But the progress has not been evenly distributed. For example, a startling comparison can be found between the states of Florida and North Carolina. In 2011, Florida’s state-run Citizens Property Insurance Corp. wrote 14.28 percent of the market, while North Carolina’s Beach Plan and FAIR Plan wrote 3.37 percent and 0.62 percent of that state’s market, respectively. As of 2016, Citizens was down to just 4.28 percent of the market, which notably allowed it to absorb an estimated 62,000 claims and $1.2 billion in insured losses from the strike of Hurricane Irma this year without any notable impairment. Meanwhile, the North Carolina FAIR Plan was up to 2.42 percent market share and the North Carolina Beach Plan was up to 7.23 percent.

There are even signs of a burgeoning movement to privatize or wind down some residual markets. Following recent successful efforts in West Virginia and Arizona to spin their workers’ compensation state funds off into private mutual insurers, a similar proposal was considered this year in Montana, although it was not ultimately adopted. Meanwhile, in New Hampshire, Insurance Commissioner Roger Sevigny has been appointed as receiver of the 40-year-old New Hampshire Medical Malpractice Joint Underwriting Association (JUA), one of a number of residual market entities originally established to provide capacity at the height of the nation’s medical liability crisis. Similar JUAs continue to operate in such states as Rhode Island, Florida, Missouri, Minnesota, South Carolina, Pennsylvania and Texas.

As discussed in greater depth in the state-by-state review section, 2017 also saw a significant effort to liberalize rate controls for commercial property and casualty insurance lines in Missouri and a successful effort to do so in Oregon. On the other side of the ledger, Delaware passed legislation that will impose among the most onerous regulatory frameworks in the country, and Illinois—long among the most free-market insurance environments in the nation—was spared from the introduction of stringent controls on its workers’ compensation market only by the Legislature’s failure to overturn Gov. Bruce Rauner’s veto.

As it has in years past, the regulatory landscape is changing. We hope this report captures how those changes may impact both the insurance industry and insurance consumers in the days to come.

Image by SAPhotog


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