Study: State-Based Insurance Regulation Drives Up Insurance Premiums

Recent study from the University of Iowa claims that multi-state regulation of insurance increases premium costs to consumers.
A study by a University of Iowa finance professor indicates that insurance consumers pay as much as 31% more in insurance premiums because insurance companies have to comply with regulations from multiple states rather than just a single regulator.[1]
Ty Leverty, a professor of finance in the Tippie College of Business, says that the expenses associated with meeting regulations in every state in which a company does business drive up compliance costs by 26 percent when compared to companies that are regulated by only one state.[2]
Leverty's study compared standard P&C insurers with risk retention groups.
Leverty's research was based on a comparison between standard property and casualty insurance companies, which he indicated were regulated by every state in which they are licensed to do business, and risk retention groups, which are specialized insurance entities focused on a single industry that must comply with the regulations in their domicile state but which are allowed by federal law to operate in multiple states, according to Leverty.[3]

The types of regulatory expenses that Leverty identified included licensing and application fees, financial reporting, independent audits, regulatory examinations and the cost of compliance with state regulations.[4]
The study compared the regulatory compliance costs of 85 insurance companies doing business in multiple states with 147 multi-state RRGs and found that traditional insurance companies have significantly higher compliance costs because of those multiple regulations. For instance, he found that the average traditional insurance company in his sample spends $187,000 a year on licensing fees in multiple states, while the average RRG spends only $49,000 for one.

In total, his research showed the average standard insurance company spends about $9 million a year to comply with regulations. RRGs, however, spend an average of $2.9 million to comply with regulations.[5]
Insurers pass these regulatory and compliance costs to consumers as increased premium.
These regulatory and compliance expenses drive up an insurance company's cost of doing business, and the companies pass these costs on as increased premiums to the consumer. Additionally, these regulatory costs "limit consumer access and market competitiveness by acting as a drag on expansion into new states" because, according to Leverty's research, the "average standard insurance company pays $74,000 in new expenses" to comply with new rules and regulations when expanding into a new state.[6]

The risk retention group is used in Leverty's study "as a proxy for a regulatory environment in which duplicative state regulatory barriers are substantially reduced."[7] The study does not seem to address any of the inherent differences in risks, underwriting or operation between "standard" property/casualty insurers and risk retention groups.

Leverty justifies a direct comparison between risk retention groups and P&C insurers by reference to a study by Born, Boyer and Barth in 2009[8] suggesting that risk retention groups have "the lowest risk-bearing capacity because of the absence of an internal capital market and the low diversification of their risk portfolio." The Born, Boyer and Barth study further suggests that the only advantage of being [a risk retention group] over a state-incorporated standard insurer must come from the absence of duplicative regulation rather than the financial and/or economic aspects of the business."[9]

Thus, acceptance of the results of Leverty's conclusions at face value also requires acceptance of the proposition that the sole significant difference between risk retention groups and "standard" P&C insurance companies is multi-state regulation.

The Journal of Risk and Insurance published Leverty’s paper, The Cost of Duplicative Regulation: Evidence From Risk Retention Groups, in Volume 79, Issue 1, pages 105-128, March 2012.

Read the full article:
1Researcher Finds Multi-State Insurance Regulation Drives Up Premiums 31 Percent, Newswise, University of Iowa press release, May 7, 2012.
2Researcher Finds Multi-State Insurance Regulation..., id.
3Researcher Finds Multi-State Insurance Regulation..., id.
4Researcher Finds Multi-State Insurance Regulation..., id.
5Researcher Finds Multi-State Insurance Regulation..., id.
6Researcher Finds Multi-State Insurance Regulation..., id.
7The Cost of Duplicative Regulation: Evidence From Risk Retention Groups, J. Tyler Leverty, Journal of Risk and Insurance, Volume 79, Issue 1, pages 105-128, March 2012.
8Risk Retention Groups in Medical Malpractice: A Test of the National Chartering Option, Journal of Insurance Regulation, 27: 4-33, Born, Boyer and Barth, 2009.
9The Cost of Duplicative Regulation..., id.

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