The 2019 edition of the R Street Institute’s annual Insurance Regulation Report Card is out and, for the second year in a row, Louisiana has the ignominious distinction of finishing dead last. By our lights, the Pelican State has the worst insurance regulatory environment in the country.
For each of the past eight years, R Street has examined the state-based system of insurance regulation to determine which states best embody the principles of limited, effective and efficient government by regulating only those market activities on which government is best-positioned to act; doing so competently and with measurable results; and with a regulatory system that lays the minimum possible burden on companies, taxpayers and ultimately, consumers.
Louisiana did not distinguish itself in any of the seven broad categories we use to evaluate solvent, competitive and apolitical insurance markets, and it performed particularly poorly in several of them.
The problems in the state’s auto insurance market are, at this point, well-known. Driven by an explosion of litigation, Louisiana’s auto insurance rates, the second-highest in the nation, have spiked 56 percent over just the past five years. Even President Donald Trump has opined on the subject.
While the report card doesn’t directly consider rates, the dysfunction in Louisiana’s auto insurance market is manifest in several other variables it does track. Most notably, the state has one of the least competitive markets in the nation, as measured by the Herfindahl-Hirschman Index, the metric used by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) to assess the degree to which markets are subject to monopolistic concentration.
On a nationwide basis, the auto insurance market last year had an HHI score of 782.3, down very slightly from 783.2 the year before, while the mean HHI score of the 50 states was 1,059.0. With an HHI score 1,556.1, Louisiana was one of just three states—New York and Alaska were the others—with auto insurance markets that would be considered moderately concentrated by the DOJ and FTC.
And while the report doesn’t directly measure insurance rates, it does look at loss ratios, expressed as losses paid as a percentage of written premiums. To smooth losses over the underwriting cycle, we rely on five-year averages from 2014 through 2018. By this metric, Louisiana’s five-year average loss ratio for personal auto insurance was 73.8, behind only Michigan and Colorado for highest in the nation.
Louisiana employs a stringent system of rate regulation, which no doubt contributes to the lack of competition in its auto insurance market. The report notes that while insurers generally have broad underwriting and rate-setting freedom in commercial lines, Louisiana has a strict prior approval system for rates in the auto, homeowners, workers’ compensation and medical malpractice liability lines of business. Explicit price controls of this sort make it difficult for insurers to offer the kinds of products they would like to sell and for consumers to purchase the kinds of products they would like to buy.
An uncompetitive auto insurance market is far from the only problem with Louisiana’s regulatory environment. The state is one of 11 in which the insurance commissioner is an elected position. The report card marks down such states on grounds that insurance is a technical matter that, by and large, should be insulated from the political process and prevailing political concerns. Trained, professional regulators can enforce the law much more effectively when unbidden by the shifting winds of political passions.
The state’s insurance taxes and fees also place undue burden on both insurers and consumers. While Louisiana collected $112 million last year in regulatory fees and assessments from insurers, it spent just 28 percent of that total on insurance regulation. The remainder, which we call “regulatory surplus,” goes right into the state treasury, effectively serving as a stealth tax on insurance consumers to fund what should be general taxpayer obligations. Expressed in percentage terms, Louisiana had the sixth-highest regulatory surplus in the country.
The report also notes that, when regulatory fees and assessments are combined with the state’s $894 million of premium taxes and $239,000 of fines and penalties, the total tax and fee burden amounts to 2.78 percent of the $36.2 billion of insurance premiums written in Louisiana. That was the second-highest tax and fee burden in the country, behind only New Mexico.
One area where the state does get credit for progress is its success in shrinking its residual market for property insurance. Rather than sponsor specialized pools for coastal windstorm risks (typically called “beach plans”) or insurance mechanisms to serve insureds who cannot find coverage in the private, voluntary market (generally known as “Fair Access to Insurance Requirements,” or FAIR plans), Florida and Louisiana are the only states that sponsor state-run insurance companies that serve both the coastal and FAIR plan markets. Much like its counterpart in Florida, Louisiana Citizens Property Insurance Corp. has seen its market share decline in recent years, falling from 3.71 percent in 2014 to just 1.42 percent in 2018.
All in all, when it comes to fostering more competitive and well-regulated insurance markets, there is a long list of areas of improvement for the Louisiana State Legislature and the recently reelected Gov. John Bel Edwards and Insurance Commissioner Jim Donelon to address in 2020. We’ll be watching.
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