Insurance Rate Controls, Data Collection Challenged in Comments to Feds

Published December 8, 2011

The U.S. Treasury Department’s Federal Insurance Office says it hopes to “bring together state insurance regulators, federal government officials, consumer organizations, representatives of the insurance industry, and insurance experts to have a meaningful exchange on potential areas for insurance regulatory reform.” The comment was made at a December conference on improving and modernizing insurance regulation,

In comments submitted November 29, policy analysts from The Heartland Institute (which also publishes FIRE Policy News) suggested the office take a closer look at state-level regulations on rate-making and underwriting in property and casualty insurance, as well as the accumulation of risk in residual markets and state-run insurers and reinsurers in states where rates have been suppressed.

The FIO conference was the latest step in the FIO’s preparations for a report it must submit to Congress by January 22 on how best to improve the U.S. insurance regulatory system. The office also is soliciting open comments on a set of 13 questions related to issues such as systemic risk, how to improve availability and affordability of insurance to underserved populations, and what, if any, role the federal government should play in regulating the insurance business.

Changing Structure

Heartland’s comment notes when the McCarran-Ferguson Act of 1945 granted the states sole regulatory authority over the insurance business, virtually all insurance rates and forms were established collectively by industry-owned rating bureaus, which raised the specter of anticompetitive collusion.

However, Heartland wrote, “The structure of the industry has changed dramatically in the nearly 70 years since McCarran-Ferguson’s passage. The rating bureaus, for the most part, are no longer owned by the industry, and many large insurers now establish rates using proprietary formulas that are independent of rating bureau recommendations. With these dramatic changes in the business practices of insurance companies, it may be fair to ask whether the regulatory justification for rate controls still holds. State rate controls persist, but in practice, they are often used not to weed out anticompetitive behavior but to stifle competition and suppress rates, particularly politically unpopular rate increases.”

State-Run Competition

Heartland also noted in some states, notably Florida and Texas, suppression of rates has coincided with the growth of very large residual market entities that compete directly with the private sector. These state-run entities typically are not regulated in the same way as private insurers, and their financing often relies heavily on post-event assessments.

In the case of the Florida Hurricane Catastrophe Fund, the only state-run general purpose property and casualty reinsurer in the country, the Fund’s own chief operating officer, Jack Nicholson, estimates the potential gap between its hard assets and liabilities could be as large as $16.28 billion.

Possible Market Disruption

“These assessments needed simply to pay interest on the bonds would be imposed directly on Florida’s consumers, which could lead to any number of negative consequences, including widespread decisions simply to drop insurance rather than pay enormous assessments,” Heartland noted. “This, in turn, could cause enormous market disruption.

“In short,” the Heartland comment continued, “the Florida Hurricane Catastrophe Fund is a serious, clear and present threat to the stability of the insurance market in Florida. Because of Florida’s status as a peak risk state, a collapse there could have vast economic implications. Thus, the Florida Hurricane Catastrophe Fund and any similar entities that might be created in the future deserve careful monitoring, as well as review of the regulations that lead to their creation.”

Heartland also reiterated its call for the FIO to promote transparency in insurance markets by making the non-confidential insurance financial data it receives from the states, the industry, or the National Association of Insurance Commissioners available to the public in electronic format through a free on-line service similar to the SEC’s EDGAR service.

‘Apparent Conflict of Interest’

“[P]ublic dissemination of insurance data by the FIO would hopefully bring to an end the absurd situation in which a private, nongovernmental entity [the NAIC] is granted a monopoly over data collected with governmental resources,” Heartland commented. “Across all industries, firms will often report that regulators tend to be indifferent or unsympathetic to complaints that requests for data consume time, resources, and manpower. That is perhaps an inevitable result of the relationship between regulated industry and its regulator.

“But in insurance, the relationship is further poisoned by an apparent conflict of interest. Regulators’ pecuniary interest in obtaining insurance data for the purpose of reselling it on the market may actually be driving public policy decisions. There is no justification for allowing such a dynamic to persist.”

R. J. Lehmann ([email protected]) is deputy director of The Heartland Institute’s Center on Finance, Insurance, and Real Estate.