For the second year in a row, the Competitive Enterprise Institute and The Heartland Institute asked two fundamental questions about America’s state insurance regulations:
How free are consumers to choose the property and casualty insurance products they want?
How free are insurers to provide the property and casualty insurance products consumers say they want?
Also for the second year in a row, we found a discouraging answer: not very free. America’s state-level insurance bureaucracies make it difficult—sometimes impossible—for insurers to offer consumers the products they need, want, and deserve.
This study consists of four sections: this introduction, which describes why we are conducting this study; an explanation and defense of the methodology we used; a review of major changes in state insurance law during 2008; and, finally, the numerical ranking itself.
We conducted this study for three reasons: because insurance is an important economic activity; because it is regulated almost entirely at the state level, resulting in significant variations of rules from state to state; and because we hope an objective look at state insurance regulation will encourage states to compete by creating freer environments for consumers and insurers.
Insurance produces considerable wealth and employment benefits. In 2007 (the most recent year for which data are available), America’s property and casualty insurers charged premiums of almost $450 billion (according to the Insurance Services Office) and employed about 585,000 Americans. However, even before the beginning of the current recession, America’s property and casualty insurance industry was shrinking. The 2006-2007 and 2007-2008 periods saw the first back-to-back declines in total property and casualty insurance industry revenue on record. Industry employment also has fallen and, when final 2008 numbers come in, it appears likely we will find the industry has shed around 30,000 jobs. More layoffs—at least 10,000—happened during early 2009.
Insurance is also the largest and most important economic activity regulated almost entirely at the state level. In some cases, this regulation leads to inefficiency. Although federal and international entities oversee banking, trade, manufacturing, and many service industries, states alone have the power to oversee property and casualty insurance ever since Congress approved the McCarran-Ferguson Act of 1945. As a result, insurers and consumers must deal with a confusing and expensive maze of state regulations. International insurers have a difficult time entering the United States market because they must enter each state market separately.
State regulation makes insurance more expensive on average because incumbent insurers often lobby political authorities for rules that limit competition and allow them to raise rates. Consumers use their political influence as voters to support rate caps and subsidies to socialize the cost of insuring against risks they face due to the choices they make and should pay themselves. Both pressures lead to less consumer choice: Major property and casualty insurers have not introduced a single major new product since modern homeowners insurance (the HO-3 policy in industry parlance) became available in 1959.
No state does a perfect job of regulating insurance, but some do better than others. We produce this ranking to give states a sense of what they ought to do if they wish to free their insurance markets. We tried to collect data that show what states should—and shouldn’t—do as they consider changes to their insurance regulatory environments.
We are conducting this study for the sake of consumers, elected officials, and individuals within the insurance industry (in that order). Its findings may not consistently reflect the opinions of those in the insurance industry or “consumer rights” advocacy groups and, indeed, may sometimes run directly counter to them. We believe an open and free insurance market maximizes the effectiveness of competition at fulfilling consumer desires.