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The cost of regulation: U.S. insurers pay $1.5 billion for states to regulate them. Outcomes vary widely.


The 50 U.S. states, Puerto Rico and the District of Columbia are projected to spend more than $1.54 billion in 2009 on the regulation of insurance, up 1.8% from this year and averaging roughly $5 for every man, woman and child in the nation, according to a Best's Review survey of regulatory budgets as reported to the National Association of Insurance Commissioners.

Regulatory spending varies significantly nationwide, ranging from a projected 2009 high of $30 per resident in Delaware to a low of $2 per resident in 11 other states.

Stripping out what departments claimed as "overhead" costs in 2007, spending on administrative and regulatory functions averaged $4 per person last year. Delaware and West Virginia topped the list at $21 and $19 per resident, respectively. At the bottom were five states that averaged $1 per resident in spending on regulatory enforcement: Arkansas, Colorado, Virginia, Illinois and Indiana.

But industry observers almost unanimously agreed that states that spend the most aren't necessarily the most active in protecting consumers, nor are, states that spend the least always the easiest regulatory environments in which to do business. Such factors could become significant as Congress weighs proposals to create a federal regulatory option for insurance, particularly since insurance regulation has proven to be a profit center for most states.

Though a handful of states make general fund allocations to their insurance departments, most are funded entirely by assessments, tees, fines and penalties imposed on companies. States collected $2.58 billion in such payments last year, providing a "regulatory surplus" of nearly $1.2 billion. And that doesn't count the $14.3 billion in premium, retaliatory, franchise and income taxes paid to states by insurers.

With those funds, states employed 13,590 full-time, contractual and inter-governmental staff last year for the regulation of insurance. Despite taking in more than their departments spend, states' success in making regulatory operations more uniform remains open to debate.

Under Pressure

In terms of staffing pressures, many can be traced to provisions put in place in the early 1990s as a part of the NAICs financial solvency accreditation program, according to former Maine Insurance Commissioner Brian Atchinson.

"At the backbone of [accreditation] was the ability of a state insurance department to ... hire and retain adequate, competent staff to be able to carry out those important regulatory functions--financial analysis, financial solvency and so forth," Atchinson said.

"You would like to think that a degree of consistency and professionalism would be applied across the board. Some states do seem to be migrating in that direction, but perhaps not all states have been able to keep up with the pace, because it can be very difficult to match the salaries professionals command in the private sector," he said.

"I think an overall comparison of dollars per capita may not capture regulatory intensity," said Birny Birnbaum, executive director of the Texas-based Center lot Economic Justice. He suggested it would be necessary to compare more specific budgets for financial exams and solvency regulation with the number of domiciled insurers in a state, and perhaps even more specifically by line of insurance.

"Some states, like New Mexico, Texas and Florida, spend a lot of time on title insurance regulation, while other states do nothing," Birnbaum said.

States completed 2,526 market conduct, financial and combined market conduct/financial exams in 2007, led by Florida's 368 and California's 247. At the other end of the spectrum, West Virginia completed just eight exams of any type last year, despite a $38.1 million budget that was seventh largest in the nation.

"It is clear to me that all states need to spend more on data collection for market analysis, on market analysis and on targeted actions to improve consumer education and the fair treatment of consumers by, and the market performance of, insurers," Birnbaum said.

In the market conduct area, the NAIC has been moving toward more multistate exams, but financial solvency remains primarily the responsibility of domiciliary states. Overall, states completed financial exams of 19.4% of their domestic insurers last year, but significant variation can be seen.

While New Mexico, Virginia and Delaware all examined the financial records of more than half their domestic insurers, Minnesota did so for only 4.1%. Others completing exams of fewer than 10% of their domestics include South Carolina, Arizona, Utah and Iowa.

Smaller states with a large number of domestic carriers, particularly those serving as captive domiciles, also face the burden of disproportionately large solvency review responsibilities. Vermont, the leading state for captives, completed one financial exam for every $2.1 million in premium written in the state. That compares with $3.81 billion of premium for every one of Minnesota's exams.

Some suggest this system of heavy reliance on domiciliary states for solvency oversight has its problems. J.Tyler Leverty of the University of Iowa notes that, in economic terms, states with small domestic insurance industries hitch a "free ride" on the work done by states with larger domestic industries.

"States with profitable domestic insurers export greater levels of regulation, and expend more per capita on regulation, while the states with small domestic insurance industries allow others to regulate for them, and thus expend less per capita on regulation," Leverty said.

"As an aside, if the federal government were made the sole regulator of insurer solvency, then the free-rider problem would be eliminated."

Serving Your Customers

Oversight of domestic companies isn't the only thing that varies widely among states. Different departments also must deal with different sorts of catastrophes, and the flood of consumer complaints that often accompany them, notes one who would know better than most: former Louisiana Insurance Commissioner Robert Wooley.

"In 2005, the people of the state of Louisiana got a bargain based on the incredible number of consumer inquiries that required our office to be open 12 hours a dab seven days a week through Christmas that year," Wooley said. "The same is true for Florida in 2004. The Midwest states are having a higher-than-usual volume of activity this year due to the flooding of the Mississippi."

Based on the 2007 consumer complaint caseload, North Dakota and Alaska were best-staffed to handle the volume, with one employee for ever), five consumer complaints. West Virginia and Hawaii were just behind, with one employee for every six complaints. Mississippi's staff was by far the most overburdened, with one employee for every 132 consumer complaints. The next most overburdened state was Wisconsin, with one staffer for every 58 complaints.

While former New York Insurance Superintendent Howard Mills believes his own state and most others generally do a good job in addressing consumer issues, he said that "one area where it can certainly be catch-or-miss is in fighting fraud."

"I happen to think that the industry would be well-served if the regulators pushed more for fighting fraud, and I don't think that the industry is doing enough itself in that area," Mills said. He's now a global adviser with Deloitte Services LP in New York City.

Nationally, departments devote 9.9% of their staffs to antifraud enforcement, led by California's 413 staff members, Florida's 288 and New Jersey's 195. However, 11 states do not maintain ant" staff dedicated solely to antifraud activities, including Connecticut, Michigan, South Carolina and Wisconsin.

Appearances Can Deceive

Judyth Pendell, a senior fellow with the AEI-Brookings Joint Center for Regulatory Studies and former public policy director with Aetna Inc., said the two states that top the list in per-capita spending--Delaware and West Virginia--actually occupy the polar extremes of another major survey. In this year's U.S. Chamber of Commerce survey ranking the fairness and reasonableness of state liability systems, Delaware was tops, while West Virginia was number 50.

"It raises one thought in my mind, which is that a high level of regulatory activity in and of itself may not mean a lot," Pendell said.

Competitive Enterprise Institute Senior Fellow Eli Lehrer pointed to another dichotomy, between two states considered to offer insurers among the greatest degrees of freedom in pricing--Vermont and Illinois. While Vermont will spend $11 for every resident in 2009, Illinois will spend just $2.

"What the numbers don't say can be as revealing as what they do," Lehrer said.

In the end, "A large budget doesn't always equate to better regulation," said former North Dakota Insurance Commissioner Jim Poolman. "It is about focused consumer protection," he said. "As more states work together and share resources, these figures will matter less because much more of state insurance regulation will be better coordinated."

* The Situation: Regulatory spending varies significantly nationwide.

* What It Means: Experts agree that states that spend the most aren't necessarily the best at protecting consumers.

* Watch For: States to work more closely together and share resources.

RELATED ARTICLE: The move toward federal oversight.

In the 110th Congress, discussions of federal oversight of insurance have centered on two pieces of legislation. The Congressional Budget Office has not as yet offered estimates of the cost impact of either one.

H.R. 5840, insurance Information Act--Would create a Treasury Department office tasked with formulating federal insurance policy, serving as a central repository for insurance market oversight, and setting international insurance policy. Supported by all pro-OFC organizations, as well as the National Association of Insurance Commissioners, Independent Insurance Agents & Brokers of America and the National Association of Mutual Insurance Companies. Opposed by the National Conference of Insurance Legislators and National Association of Professional Insurance Agents. Cleared a House subcommittee in early June and could be taken up by the Senate Banking Committee sometime this fall.

S. 40/H.R. 3200, National Insurance Act--Proposes an independent Office of National Insurance be created within the U.S. Treasury Department to oversee a parallel system of regulation and supervision for those insurers and producers that opt to be licensed or chartered at the federal level. Opposed by state regulators and legislators, independent property/casualty agents and many smaller property/casualty insurers. Supported by most life insurers, life insurance agents, larger property/casualty insurers, reinsurers, national brokers and banks. Generally seen as unlikely to move this year.

The issue of agent licensing is also part of legislation--H.R. 5611, the National Association of Registered Agents and Brokers Reform Act--that would create the long-proposed National Association of Registered Agents and Brokers to administer extraterritorial licensing nationwide.
Highest Percentage of Nonresident
Licensed Producers

1. District of Columbia 97.8%
2. Wyoming 92.8%
3. Vermont 92.4%
4. Delaware 90.6%
5. Rhode Island 89.0%

Lowest Percentage of Nonresident
Licensed Producers

1. Puerto Rico 0.01%
2. California 27.9%
3. New York 38.0%
4. Texas 40.7%
5. Florida 44.0%

Source: National Association of Insurance Commissioners


Although not generally earmarked for insurance regulation, state premium taxes have been made a part of the federal regulation debate by state legislators, who argue that losing any part of the $14.3 billion in premium, retaliatory, franchise and income taxes paid by insurance companies could leave gaping holes in state budgets.
Five states that collect the most insurance

1. California $2.16 billion
2. Texas $1.24 billion
3. New York $1.23 billion
4. North Carolina $504.3 million
5. New Jersey $448.2 million

The five states whose tax burdens claim the
highest percentage of premium volume:

1. Nevada 3.4%
2. New Mexico 2.6%
3. Mississippi 2.1%
4. West Virginia 1.9%
5. Arizona 1.6%

Source: National Association of Insurance

How the Budget Was Used

 Main Accomplishments of 2007

Alabama Codified Beach Pool Program; expanded captive law to
 include coastal homeowners

Arizona Implemented online Insurance Professional
 License Update System

Connecticut Established Consumer Affairs Division;
 improved product filing approval times

Florida Launched Web-enabling company admission applications;
 provided consumer access to competitive insurance
 product information using I-FILE system

Hawaii Adopted NAIC Model Acts for annuity protections,
 long-term care and military sales; adopted NCOIL Model
 Market Conduct Act and a statewide building code law

Kentucky Captive insurer program ranked ninth in the U.S. and
 was among the top 25 in the world; implemented
 Insurance Coverage Affordability and Relief to Small
 Employers (I-CARE)

Massachusetts Decision to transition from "fix and establish"
 automobile insurance system to managed competition

Minnesota Shut down title insurance business scam; served as lead
 state in multistate exam on issues affecting workers'
 compensation; took 13 actions against suitability of
 annuity sales, resulting in fines of $4.9 million

Mississippi Passed revisions to state-run windpool board

Missouri Stopped unjust insurance sales; created captive
 insurance program; expanded health insurance coverage

New Jersey Recovered $8.7 million from insurance consumer
 enforcement; maintained reasonably priced homeowners
 insurance market; developed new Common Territory Map

Oregon Improved transparency for health care costs; conducted
 financial outreach program to seniors; prohibited
 homeowners insurance cancellations after Dec. 2007
 storms; enhanced protection for buyers of medical
 discount cards and vehicle theft-protection products

Pennsylvania Helped recover $1 million in unpaid claims; collected
 $9 billion from insurer accused of illegal activity;
 announced Commonwealth court's approval of Fidelity
 Mutual rehabilitation plan

Puerto Rico The Office of the Commissioner of Insurance and
 University of Puerto Rico developed INSOL to determine
 vulnerability of structures affected by natural

Texas Returned nearly $33.5 million to consumers through
 claim payments and refunds as a result of Consumer
 complaint resolution; created new division of Workers'
 Compensation within Department of Insurance

Vermont Early leadership role in designing and implementing
 Interstate Insurance Product Regulation Commission

Wyoming Created market conduct section within Department of
 Insurance; implemented procedures to further streamline
 and make uniform licensing of insurance producers

 Goals for 2008

Alabama Update licensing lows; pass interstate compact

Arizona Maintain high standards of customer service and ensure
 financial solvency of insurers

Connecticut Enhanced Web site with consumer focus and develop
 proactive public outreach plan; begin improvements for
 Consumer Services Division

Florida Creation of the Cover Florida Health Access Program;
 pass legislation to prohibit use of occupation,
 education and income level in dictating insurance rates

Hawaii Passed an update of the lows governing insurance
 company investments and a special purpose financial
 vehicle law to allow efficient use of a captive for
 securitizations of insurance products

Kentucky Establish long-term-care partnership insurance program
 with Kentucky Department for Medicaid Services;
 strengthen and provide more accountability to local
 government premium tax system

Massachusetts Continue improvements to the coastal homeowners
 insurance issue; bring better rates to good drivers
 through managed competition; ensure success of health
 care reform initiative

Minnesota Mandate use of SERFF for all product filings; upgrade
 automated licensing process; improve on-site response
 to natural disasters; upgrade fraud enforcement to
 match increasing criminal activity

Mississippi Allocate $25 million for the next four years to the
 board; revise building codes; lobby Congress to develop
 state-level catastrophic reinsurance program; develop
 plan for federal backstop

Missouri Implement state-based systems; reform insurance

New Jersey Repeal "take all comers" rule for auto insurance,
 continue auto reforms; implement new commercial health
 care rules for provider network contracts; develop
 regulations for U.S. and non-U.S. reinsurance carriers

Oregon Encourage insurers to bring 'green' products into
 marketplace; enhance outreach to consumers; improve
 technology for consumer access to services; improve
 electronic producer licensing and form filing

Pennsylvania Health care reform; focus on Highmark/Independence Blue
 Cross consolidation; make insurance lows fair to
 individuals and small businesses

Puerto Rico Develop International Insurance Center; OCI's
 accreditation by the NAIC; modernization of Puerto
 Rico's insurance code

Texas Regulate insurance marketplace firmly and fairly by
 implementing and enforcing the law

Vermont Implement online services, including digitizing record
 retention, online applications and renewals for
 producer licensing; make more information available
 online to public and industry

Wyoming Improve outreach and assistance to Wyoming consumers;
 begin legislative process to adopt life settlement/
 viatical law that protects consumers; improve
 efficiency and uniformity of product licensing

What U.S. States Spend

 2009 2007
 Projected 2008 Adjusted
 Per Per Per
State Population Capita (1) Capita Capita (2)

Alabama 4,599,030 $4 $4 $3
Alaska 670,053 $10 $9 $6
Arizona 6,166,318 $3 $3 $3
Arkansas 2,810,872 $4 $4 $1
California 36,457,549 $6 $6 $5
Colorado 4,861,515 $2 $2 $1
Connecticut 3,504,809 $7 $7 $4
Delaware 864,764 $30 $29 $21
District of
 Columbia 588,300 $14 $14 $4
Florida 18,680,367 $6 $7 $4
Georgia 9,364,000 $2 $2 $2
Hawaii 1,283,388 $9 $9 $7
Idaho 1,466,465 $5 $5 $4
Illinois 12,831,970 $2 $2 $1
Indiana 6,313,520 $2 $2 $1
Iowa 2,982,085 $4 $4 $3
Kansas 2,750,000 $4 $4 $4
Kentucky 4,200,000 $5 $9 $7
Louisiana 4,287,768 $7 $7 $5
Maine 1,321,574 $7 $7 $6
Maryland 5,600,388 $5 $5 $3
Massachusetts 6,437,193 $2 $2 $52
Michigan 10,071,822 $3 $3 $6
Minnesota 5,167,101 $3 $3 $2
Mississippi 2,911,000 $3 $3 $2
Missouri 5,878,415 $2 $2 $2
Montana 944,632 $16 $15 $13
Nebraska 1,768,331 $6 $5 $4
Nevada 2,495,529 $4 $4 $3
New Hampshire 1,314,895 $7 $6 $5
New Jersey 8,724,560 $3 $3 $3
New Mexico 1,969,915 $4 $3 $3
New York 19,306,183 $18 $16 $9
North Carolina 8,856,505 $4 $4 $3
North Dakota 642,200 $6 $6 $4
Ohio 11,478,006 $3 $3 $2
Oklahoma 3,617,316 $3 $3 $2
Oregon 3,700,000 $2 $2 $2
Pennsylvania 12,441,000 $2 $2 $2
Puerto Rico 3,808,610 $2 $3 $2
Rhode Island 1,067,610 $5 $5 $5
South Carolina 4,321,249 $4 $4 $3
South Dakota 796,214 $2 $2 $2
Tennessee 5,797,289 $2 $2 $2
Texas 23,904,380 $4 $94 $3
Utah 2,550,000 $4 $4 $2
Vermont 623,908 $11 $11 $9
Virginia 7,712,091 $3 $3 $1
Washington 6,395,798 $4 $4 $3
West Virginia 1,818,470 $22 $21 $19
Wisconsin 5,556,506 $3 $3 $2
Wyoming 515,000 $5 $4 $4

 Total Complaints
 Employees Per 2007
State (3) Employee Exams (4)

Alabama 196 24 13
Alaska 61 5 2
Arizona 162 19 79
Arkansas 183 18 17
California 1,429 25 247
Colorado 103 41 31
Connecticut 145 46 54
Delaware 210 19 102
District of
 Columbia 93 7 11
Florida 1,241 46 368
Georgia 310 33 41
Hawaii 79 6 48
Idaho 85 11 4
Illinois 255 42 95
Indiana 124 45 39
Iowa 103 19 18
Kansas 154 30 23
Kentucky 225 20 35
Louisiana 354 13 47
Maine 82 12 7
Maryland 270 50 29
Massachusetts 133 17 38
Michigan 157 27 37
Minnesota 97 25 9
Mississippi 102 132 11
Missouri 198 24 97
Montana 56 42 11
Nebraska 99 17 39
Nevada 122 20 27
New Hampshire 82 14 7
New Jersey 651 11 34
New Mexico 92 10 14
New York 1,182 45 81
North Carolina 420 18 61
North Dakota 47 5 9
Ohio 340 21 60
Oklahoma 158 29 33
Oregon 91 43 23
Pennsylvania 330 49 111
Puerto Rico 121 10 12
Rhode Island 43 13 14
South Carolina 104 26 19
South Dakota 35 27 8
Tennessee 169 20 10
Texas 1,717 16 159
Utah 105 10 18
Vermont 76 8 148
Virginia 205 20 57
Washington 218 26 18
West Virginia 410 6 8
Wisconsin 141 58 41
Wyoming 30 16 2

State Producers Domestics Surplus (5)

Alabama 89,645 44 $906,139
Alaska 30,627 9 $53,912,880
Arizona 131,932 355 ($594,900)
Arkansas 63,736 68 $5,741,537
California 279,818 179 ($3,106,891)
Colorado 99,292 62 ($53,038,180)
Connecticut 92,949 105 $470,620
Delaware 54,053 145 ($13,846,849)
District of
 Columbia 44,461 90 $5,977,213
Florida 356,394 525 $558,527,008)
Georgia 137,881 110 $381,234,188
Hawaii 31,071 189 ($56,363,759)
Idaho 59,676 17 ($112,000)
Illinois 163,273 371 $523,216,357
Indiana 129,954 181 ($4,603,993)
Iowa 73,853 214 $4,500,304
Kansas 84,585 48 $7,518,275
Kentucky 105,532 77 $53,369,580
Louisiana 85,861 131 $58,316,283
Maine 66,951 24 ($2,927,667)
Maryland 143,563 73 ($302,364)
Massachusetts 74,358 89 $569,648,921
Michigan 160,992 154 ($44,531,919)
Minnesota 97,374 170 $7,806,044
Mississippi 78,216 45 ($1,260,042)
Missouri 113,813 213 ($12,190,102)
Montana 49,055 55 ($7,187,465)
Nebraska 63,049 100 $4,670,307
Nevada 85,200 150 $2,205,710
New Hampshire 48,554 42 $1,871,543
New Jersey 148,180 109 $46,775,651
New Mexico 73,530 21 $9,988,292
New York 212,125 597 $468,543,116
North Carolina 145,926 88 $3,668,673
North Dakota 45,690 39 $1,403,196
Ohio 245,378 256 $20,200,217
Oklahoma 77,460 90 $14,125,764
Oregon 74,495 45 $2,613,511
Pennsylvania 174,583 295 $22,971,539
Puerto Rico 6,922 57 ($1,715,116)
Rhode Island 44,643 34 ($4,191,076)
South Carolina 114,622 219 $20,544,827
South Dakota 41,177 45 $9,417,210
Tennessee 117,721 63 $1,246,500
Texas 233,767 459 $82,935,650
Utah 68,768 201 $415,495
Vermont 39,878 591 $10,729,323
Virginia 140,982 63 $42,636,053
Washington 86,464 56 $9,517,727
West Virginia 67,197 24 $6,464,972
Wisconsin 114,622 381 $5,434,400
Wyoming 36,942 5 $77,364

(1) Projected 2009 departmental budget per state resident

(2) 2007 administrative and regulatory budget, minus overhead, per

(3) Includes both full-time equivalents and intergovernmental and
contractual employees

(4) Includes completed 2007 market conduct exams, financial exams and
combined market conduct/financial exams for both foreign and domestic

(5) The difference between all fees, assessments, fines and penalties
collected by the state in 2007, and the state's 2007 budget

Source: National Association of Insurance Commissioners
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Article Details
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Title Annotation:Regulatory/Law: Governance
Comment:The cost of regulation: U.S. insurers pay $1.5 billion for states to regulate them.
Author:Lehmann, R.J.
Publication:Best's Review
Article Type:Cover story
Geographic Code:1USA
Date:Sep 1, 2008
Previous Article:Rating actions.
Next Article:Doctor's orders: this physician-owned medical malpractice insurer stays healthy by keeping active.

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