Insurance Rate Controls Weigh Heavily in Regulator Report Card

A new report card from the Heartland Institute’s spin-off insurance think tank, the R Street Institute, grades each state’s regulatory agency on 14 factors, with one of the biggest make-or-break issues being how much regulation a state imposes on insurance rates. States with less regulation fared better in the report.

R Street says it aims to support ”free markets; limited, effective government; and responsible environmental stewardship.”

Overall, Vermont, Illinois, Ohio, Wyoming and Idaho were ranked on top in the institute’s report. All those states received an “A” grade for their point totals, except for Vermont, which received an “A+.”

From highest to lowest, California, Texas, Massachusetts, New York and Florida scored at the bottom of all states in the report.

Higher Grades for Less Rate Controls in Report

The report’s “rate regulation” category proved to be a chief determining factor in whether or not a state was graded well overall.

Illinois, which garnered the second-highest point total of states in the report, also got the highest number of points within the rate control category. The report’s authors said the state was awarded for employing a “nearly pure free market.”

“The state of Illinois is unique in which insurers generally do not have to file rates at all, although they must keep documentation of their rates available for regulators to review,” the report stated.

Other States Graded Lower for Greater Rate Regulation

The institute said its stance is that fewer rate regulations in a state help consumers get access to the best auto insurance coverage available, and graded state regulators with that belief in mind.

“We should admit our biases up front: when it comes to prices, we believe markets regulate themselves,” the report stated.

The report chided states that it said employ “a variety of schemes to impose controls on how quickly or how sharply premium rates can rise.”

One such state was Florida, which got the lowest point total and grade of any state in the report, and was the only state to be deducted 20 points for its rate regulation practices.

Florida’s state-run Citizens Property Insurance Corp. (CPIC) has capped rate hikes at 10 percent annually since 2010, according to the report. Such a practice “effectively acts as the ceiling on rates that private insurers can charge,” according to the institute, and “state-made rates” go against the free market principles that encourage competition between insurance providers and better prices for consumers.

New York saw less damage from its rate control practices, but the Empire State still had the second-lowest point total in the report. Regulators there employ a system requiring prior approval of rates that led to a 10-point deduction from the institute.

The institute deducted fewer points for “file-and-use” systems that restrict regulators from intervening in rate changes except in extreme instances. Some file-and-use systems are still very limiting, according to the institute.

Texas was one such example, as the Lonestar State was deducted the same 10-point penalty as New York even though its rate regulation practices operate under file-and-use laws.

“In theory, Texas has a ‘file-and-use’ law, but insurers report that filings prove so burdensome that it functions similarly to a prior-approval system,” according to the report.

Report Finds ‘Modest Trends’ Toward Freedom in Markets

The institute compiled its grades with three questions in mind, according to its report

1. How free are consumers to choose coverage?
2. How free are insurers to provide the coverage consumers say they want?
3. How effectively are states discharging their duties in monitoring insurer solvency, policing crime and encouraging competitive, private markets?

Data from 2011 showed “continued modest trends” toward freedom in insurance markets, according to the report, which also highlighted several events in the past year it said showed negative developments from regulators.

One of those developments was in Florida, where the CPIC saw its number of policyholders grow to 1.4 million, making it the state’s largest property insurer.

“Little was done to advance” efforts to reduce the number of insured under the state-run insurance agency, the report stated, and CPIC managers are now grappling with several depopulation strategies, including eliminating the 10-percent cap on annual rate hikes for new policies.

About Charles Nguyen
Charles Nguyen is an enterprising journalist who reported for Patch.com and the Desert Dispatch and was the editor in chief of the Guardian (the twice-weekly newspaper at the University of California, San Diego) before coming to Online Auto Insurance News.

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