Multistate regulation adds 26 percent on average to the expense ratio of a multistate commercial liability insurer. That’s compared to an insurer, such as a risk retention group, which only has to comply with a single state’s regulations yet can do business in multiple states.
These costs of duplicate regulation “reduce the technical efficiency of firms, deter firms from operating in additional states, and increase the price of insurance,” says researcher Tyler Leverty, a professor of finance in the Tippie College of Business, who decided to try to quantify the added costs after hearing the complaints about them for years.
While it’s not surprising to learn that multistate regulation adds costs, Leverty himself was surprised by how much it adds.
The study compared the regulatory compliance costs of 85 insurance companies doing business in multiple states with 147 multistate 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 spends $187,000 a year on licensing fees in multiple states, while the average RRG spends only $49,000 for one.
By the way, he accounted for the expenses differences between RRGs and insurers including RRGs not being assessed for guaranty funds and not having to spend much on marketing.
Some readers of Insurance Journal could not help but go into reactionary mode upon reading about Leverty’s research, attacking him and his methods, all regulation in general and federal regulation in particular, even attacking research by academics.
Some saw the study as an argument for single state or federal regulation. But Leverty says that’s not the case.
“I’d be cautious to make that point. The reason for my caution is that I am looking at one side of the ledger. I’m looking at the costs. There are strong arguments on the other side, the benefit side of state regulation, dealing with the fact that states have local needs and there’s regulatory competition between the states and they gravitate to some equilibrium policy. The major conclusion or major point in my study is that there probably should be increased efforts to eliminate any unnecessary differences in regulation among the states, and there should be increased efforts to reduce the duplication in regulation,” the professor says.
Leverty’s research contributes to but does not end the discussion on insurance regulation. It does not answer whether multistate costs are justified or unjustified or how they might be reduced. It does, however, demonstrate that the costs are measurable and should not be ignored.