Duplicate Regulation Drives Up Commercial Premiums
Buyers of commercial liability insurance pay as much as 31 percent more in insurer compliance costs if their insurance company has to comply with regulations from multiple states instead of just a single regulator, according to new research by a University of Iowa insurance expert.
Tyler Leverty, an assistant professor of finance in the Tippie College of Business, says that the expenses associated with meeting regulations in every state in which an insurance company does business drive up compliance costs by 26 percent when compared to companies that are regulated by only one state.
"These high regulatory compliance costs reduce the technical efficiency of firms, deter firms from operating in additional states, and increase the price of insurance," says Leverty.
In his research, Leverty compared the regulatory compliance costs of standard property/casualty insurance companies that solely write commercial liability insurance (including commercial auto liability, other liability, and medical malpractice) to the compliance costs of risk retention groups (RRGs), which are permitted to write only commercial liability. Leverty also limited his sample to insurers that began writing after 1989. He found 147 RRGs and 85 insurers that met these conditions.
Standard insurance companies are regulated by every state in which they are licensed to do business, and so must comply with regulations in each of those states. RRGs are specialized insurance companies usually focused on a single industry that are allowed by federal law to operate in multiple states, but only have to comply with regulations in the state in which they are headquartered.
"Multi-state insurers face multiple regulatory bodies and multiple sets of regulations with which they must comply," Leverty says. "The central complaint against state regulation is the inefficiencies and duplicative costs inherent in complying with multiple regulators and regulations that drive up costs."
Regulatory costs include such expenses as licensing application fees, presenting financial and statistical reports, paying for independent audits and regulatory examinations, and ensuring internal compliance with state regulations.
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.
Leverty says those costs then drive up a firm’s expenses and are passed along to policyholders in the form of higher premiums. But more than that, he writes, they also limit consumer access and market competitiveness by acting as a drag on expansion into new states. Leverty’s research showed that the average standard insurance company pays $74,500 in new expenses whenever it enters a new state to comply with regulations in the new market.
Leverty’s paper, “The Cost of Duplicative Regulation: Evidence from Risk Retention Groups,” was published recently in the Journal of Risk and Insurance. It’s available online.
Listen: an Insurance Journal podcast interview with Professor Leverty.