No. 118 Property & Casualty Insurance Report Card (summary html)

This report card outlines the methodology and results of a joint Heartland Institute/Competitive Enterprise Institute project to produce a 50-state report card on insurance regulation. Idaho, Illinois, Utah, Vermont, and Wisconsin are found to have the best insurance environments while California, Florida, Maryland, Massachusetts, and North Carolina the worst.

This Property & Casualty Insurance Report Card assigns grades to the 50 states of the United States based on the effectiveness of their property and casualty insurance regulation. Idaho, Illinois, Utah, Vermont, and Wisconsin get "A" grades, while California, Florida, Maryland, Massachusetts, and North Carolina get "F" grades.

We rated states using nine variables. On each variable we established a modal score of zero: States received a score of "zero" on each variable unless they do something exceptionally "good" or "bad" relative to other states.

The states with freer markets, on balance, provide more consumer choice, more predictable rates, and insurance premiums that better reflect actual risk. The states with more restricted markets provide none of these things.

1. Residual Markets

The first variable is the size of the state's residual market for automobile insurance, which is that part of the market served by government-provided insurance. A large residual market reflects state regulations that make it impossible for the private sector to write "voluntary" automobile policies. Although all states have a mechanism for writing this type of insurance, most write very few policies. Maryland, Massachusetts, New York, New Jersey, and North Carolina have particularly large residual automobile insurance markets and were penalized in our rankings.

Similarly, a large residual market for homeowners insurance, the second variable examined for this report card, reflects state regulations that make it impossible for the private sector to write "voluntary" homeowners' insurance policies. Thirty-four states maintain a residual homeowners insurance market of some sort. Most of these are very small. California, Florida, Massachusetts, and Rhode Island, however, have large residual homeowners insurance markets and were penalized in our rankings.

2. Market Concentration

In most cases, a highly concentrated market for automobile or homeowners insurance reflects a lack of consumer choices. We awarded points to states with lots of choice, and took away points from states with few choices.

Arizona, California, Connecticut, Maine, and Vermont have particularly competitive auto insurance markets. The markets in Alaska, the District of Columbia, Louisiana, Massachusetts, and West Virginia offer a distinct lack of choice.

Connecticut, Maine, Massachusetts, New Hampshire, and Rhode Island offer particularly competitive homeowners insurance markets. The markets in Alabama, Alaska, Arizona, the District of Columbia, Louisiana, and Mississippi, by contrast, offer very little choice.

Some states maintain what appear to be competitive markets by creating regulatory situations where companies may be willing to write a few policies, but almost no company wants to do a significant share of its business in those states. We correct for this by weighting other variables.

3. Automobile Insurance Loss Ratio Stability

In almost all cases, insurers' loss ratios (the share of dollars of premium paid per dollar of claims) have a major impact on premiums. Because the loss ratios for homeowners insurance are driven largely by weather-related events rather than regulatory policy, we do not evaluate them. Automobile insurance loss ratios, however, fluctuate largely on the basis of political factors. In the long run, neither consumers nor insurers benefit from quick swings in the premiums charged for insurance.

Alabama, Connecticut, Georgia, Nevada, and New Jersey had particularly stable loss ratios and thus appear likely to have particularly stable premiums. By contrast, Louisiana, Massachusetts, Mississippi, New York, and Utah had particularly volatile automobile insurance loss ratios.

This measure does not directly relate to insurance company profitability: A state where insurance companies lost money year after year could still have stable loss ratios.

4. Regulatory Environment

All states exercise some sort of control over the rates insurance companies charge. This inevitably forces some policyholders, who take fewer risks, to subsidize policyholders who take more risks. Since this market distortion is unlikely to benefit consumers, we award states with minimal price regulation with points, and deduct points from states with the most strict price controls.

Three states Florida, Massachusetts (which has announced plans to change its policies), and South Carolina dictate what rates insurers charge in one category of insurance. Florida and South Carolina do this through their own participation in the insurance market, while Massachusetts establishes rates by legislative fiat. One other state (California) exercises a more limited but still inherently centralized form of rate-setting in all categories of insurance. These four states received the worst grade in our study.

One state, Illinois, maintains a "no file" system that allows market forces to set nearly all insurance rates. It received the best score on this variable.

5. Form Regulation

All 50 states oversee the forms insurers use. This can slow innovation by making it difficult for insurers to respond quickly to consumer demand for better, more easily understood information. Four states Colorado, Hawaii, Michigan, and Rhode Island allow insurers to "use and file" forms; that is, insurers may begin using new forms at once and simply tell state officials they're doing so. These four states do less to restrict product innovation than the others, and thus receive high marks.

6. Credit Scoring

Years of actuarial science have revealed that credit scores provide a treasure trove of valuable risk information about people seeking insurance. States that restrict the use of this information by insurers make the marketplace less efficient, hurting insurers and consumers. Most states place a few reasonable restrictions on the use of credit scores, but six states California, Delaware, Hawaii, Maryland, Massachusetts, and Washington significantly restrict their use.

7. Territorial Rating

The places people live or park their cars at night can significantly impact the risks implicit in writing home and auto insurance for them. Most states, sensibly, allow insurers to take this into account with only a few restrictions. Doing so results in fairer, often lower, rates for average consumers.

Several states, however Colorado, Delaware, Florida, Hawaii, Maryland, Massachusetts, Michigan, Missouri, New York, Pennsylvania, and Texas all place significant limitations on territorial rating in at least one major category of insurance. They lost points in this report card for doing so. By contrast, Alabama, Alaska, Idaho, Mississippi, New Mexico, Tennessee, Utah, and Vermont place no limitations on the use of geography in rating insurance risks. They were awarded points.

Based on Eli Lehrer, Property & Casualty Insurance Report: A State-by-State Analysis of Regulatory Burden (Chicago, IL: The Heartland Institute, March 2008.March ). Copies of the 40- page report card are available for $10 each. Permission is granted to reprint or quote from this Executive Summary, provided appropriate credit is given.

2008 The Heartland Institute. Nothing in this Heartland Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of legislation. Questions? Contact The Heartland Institute, 19 South LaSalle Street #903, Chicago, IL 60603; phone 312/377-4000; fax 312/377-5000; email think@heartland.org; Web http://www.heartland.org.