"Report card" ranks states with best and worst climates for insurance companies
The 2011 Property and Casualty Insurance Report Card from The Heartland Institute, a nonprofit research organization that advocates free-market principles, is designed to determine which states provide the most freedom for insurers to do business. Some states fared better than others, when it came to Heartland's criteria.
Making the grade
Grades were assigned based on categories like politicization, regulatory clarity, rate regulation, residual markets, market concentration, credit scoring and territorial rating. States were rewarded or docked points based on their performance in each category and assigned an overall grade of A through F, depending on their overall performance.
- Politicization: States were docked points if candidates made insurance regulation part of their election platform. According to Heartland, a more hands-off approach is best when it comes to elected officials' treatment of insurers.
- Regularity clarity: This category dealt with how easy it is for insurers to understand regulations and how consistently the regulations are enforced. States were docked points if, for example, insurance laws were vague and deadlines for filing paperwork were unclear.
- Rate regulation: States were rewarded if they gave insurers the flexibility to determine their own rates. If, however, a state prevents insurers from charging high-risk customers more, it was penalized.
- Residual markets: State-run insurance pools also known as residual markets) provide coverage at "reasonable" rates when private insurers are unwilling or unable to do so. Heartland views these pools as "government-supported" enterprises that "prevent the market from meeting consumers' needs." States with large residual markets were penalized in the rankings.
- Market concentration: Market concentration refers to the level of competition in the insurance market -- the number of insurers doing business in the state relative to its size. States with more variety were rewarded with points.
- Credit scoring and territorial rating: Insurers use credit scores and location factors when assessing the risk posed by individual consumers. The credit score and geographical location of the customer provide reliable measurements of risk, according to Heartland. States that bar insurance companies from using them were penalized.
Top five states
After tallying up all the points, Heartland determined the average and assigned letter grades. States that were well above the average got A's, and those well below it got F's. The top five were:
- Vermont A+).
- Ohio A+).
- Illinois A).
- Maine A).
- Wisconsin B+).
Both Vermont and Ohio posted strong marks across the board, according to Heartland. Both states have clearly written and enforced regulations, flexible rate-setting policies and strong market competition, and they rely little on state-run insurance pools.
Illinois, with its no-file system, was the only state to receive maximum points for insurance rate regulation. Under a no-file system, insurers do not have to have their rates approved by the state insurance commissioner in advance. Maine and Wisconsin had respectable scores across the board, with Maine receiving the higher grade for its marketplace competition in the auto insurance industry.
Bottom five states
According to Heartland, these states were the most hostile to insurers:
- Florida F).
- California F).
- Texas F).
- Hawaii F).
- Massachusetts D-).
Of these five states, only Hawaii didn't have a highly politicized environment -- yet it suffered because of its poor competition score. None of these states had a positive regulatory clarity score, and Texas and California had negative scores. All received negative scores for their residual markets; Massachusetts and Florida have especially large ones when it comes to home insurance. California was second worst despite a positive score for marketplace competition.
Florida came in dead last based on Heartland's criteria, and the report singled it out for its dysfunctional insurance market and state regulations. Not only did the state experience a wave of insurer insolvencies, but these insolvencies took place in a year when there wasn't a significant disaster. The companies, the report says, "simply ran out of money in a storm-free year."The Heartland report blames over-regulation of the Florida insurance market. As a consequence, the state's Citizens Property Insurance Corp., the state's residual home insurance market, grew significantly.
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