The Insane Cost of US Insurance State Regulation

The Federal Insurance Office has released its report on how to modernize American insurance regulation, mandated as part of the Dodd-Frank Wall Street Reform Act. Almost all insurance regulation in the United States is done on a state level, which the report largely takes aim at.

The need for the United States to modernize its insurance industry is summarized in the following figure. Per dollar of premium spent, the costs of the US based insurance regulatory system is 6.8 times higher than for insurers in the United Kingdom. The report continues that "the need for uniformity… compels the conclusion that federal involvement of some kind in insurance regulation is necessary." The report does not recommend a federal takeover of the current state-based system, but rather adoption of nationwide best practices by more states to promote uniformity.

Areas of recommended near-term reform for states include capital adequacy safeguards, uniform standards for marketplace regulations including underwriting criteria, and increasing the number of products reviewed and rated by the Interstate Insurance Product Regulation Commission. Essentially the report outlines various best-practices commissions that are currently operating across the US, but only certain states participate in. The report urges that if all states agreed to participate in more of the established patchwork of best practices commissions it would facilitate consistency and clarity to the overall national insurance market. It is only by expanding the current patchwork of state-to-state commissions and best practices can the US begin to lower the cost of doing business in the US insurance market, which as stated previously is 6.8 times greater in some respects than for insurers operating in the United Kingdom.

The report goes on to examine other areas in depth, such as potential federal solutions to areas where state regulation has failed to modernize, but the message is clear. The insurance industry in the United States is complicated because each state regulates insurance. For companies working with vendors and suppliers across multiple states, this makes it very difficult to verify that vendors insurance is both in compliance with their contract, as well as ensuring that vendor is in compliance with state insurance regulations. For example, a company operating in three different states will collect insurance from vendors operating in all three states, but what if the workers compensation laws are different, what is the auto liability required minimums are different, etc.? Its one thing to simply ask a vendor to assent to a boilerplate contract insurance requirements, but the important next step is collecting, analyzing and verifying the insurance, licensing and other compliance documents of your vendors to ensure proper insurance certificate tracking and auditing.