Like the underachieving student in the back of the class, Georgia recently earned a C grade for its regulation of the insurance market, as laid out in the annual Insurance Regulation Report Card issued by the R Street Institute. While that represented a slight improvement over the C- the state received in last year’s report, the state’s uninspiring and subpar mark still should be concerning to Georgians.
The Georgia Department of Insurance is the regulatory entity charged with overseeing insurance within the Peach State. Its primary duty, like that of every other state insurance department, is to ensure that insurers based in Georgia are financially solvent and able to uphold the promises they make to policyholders. To do this, the department regularly conducts financial exams of Georgia’s insurance companies, looking at each company’s assets, liabilities and policyholder surplus.
The National Association of Insurance Commissioners (NAIC), the national private entity that sets standards for insurance regulation, recommends in its Financial Analysis Handbook that every insurer should be examined at least once every three to five years. The R Street report notes that, over the past five years, the average state has conducted financial exams of about 129 percent of its domestic insurers. That means roughly a third of the companies have been examined more than once. The highest performing states have examined all of their domestic companies twice in the past five years.
Georgia, on the other hand, has completed financial exams of just 78 percent of its domestic companies, one of the worst records in the country. In fact, only six states completed a smaller percentage of financial exams than Georgia.
This isn’t something to be taken lightly. There are red flags that Georgia’s property/casualty insurance industry may not have enough capital to support its obligations. The most common way to measure how well-capitalized an insurance company is by dividing its written premiums by its policyholder surplus. A low ratio of premiums to surplus is considered a sign of financial strength, while higher ratios suggest the company has little capacity to write additional business
R Street measured the premium-to-surplus-ratios, weighted by market share, of every property/casualty insurer doing business in every state in the nation. They found an average weighted statewide capitalization ratio of 856. Georgia’s ratio of 1142.4 was the sixth-highest score in the nation. This suggests that an unexpected claims shock—such as a large hurricane or a spate of lawsuits—could create mass insolvencies. That heightens the urgency for Georgia regulators to be on top of financial exams, which they haven’t been.
All of this would be bad enough if the problem were just that the department lacked the resources to do its job, but the reality is that Georgia collects way more in fees and assessments from regulated insurance companies than it spends on regulation. In 2017, Georgia collected $56.1 million in regulatory fees and assessments from insurance companies, but spent less than half that amount, $21.2 million, on insurance regulation.
It’s important to note that these figures don’t include the $3.5 million in fines and penalties the department collected in 2017. Those are meant to discourage bad behavior and to compensate victims of that behavior. Nor does it include the $480.1 million in premium taxes the state took in, as those are a form of sales tax. The regulatory fees and assessments are solely those filing fees, examination fees, licensing fees and other payments required of insurers to support the cost of insurance regulation.
So where does that money go? Mostly into the state treasury, with the insurance department only getting to keep about $5 million of the pot for itself. For the rest of its $21 million budget, Georgia insurance regulators must rely on appropriations from the general fund. In April 2017, former Insurance Commissioner Ralph Hudgens announced that the department would have to lay off and furlough staff because it had overspent its budget, even though the state’s coffers were overflowing with revenues from the insurance industry. That’s insane.
By taking in more in regulatory fees than it spends on regulation, Georgia is laying a stealth tax on the state’s insurance consumers, who ultimately pay these fees in higher insurance premiums. What’s worse, it’s not even spending that money wisely, as the state has fallen behind on its primary duty of policing solvency.
Georgians certainly aspire to be better than a C student, and we definitely want a sound insurance market. With a new governor, a new legislature and incoming Insurance Commissioner Jim Beck, there is hope that Georgia may improve how it regulates insurance. By fostering a healthy, competitive insurance market and removing unnecessary regulations, Georgia can positively impact millions of people.
Marc Hyden is the R Street Institute’s director of state government affairs, and he is a long-time Georgia resident. You can follow him on Twitter at @marc_hyden.
R.J. Lehmann is director of finance, insurance and trade policy at the R Street Institute. You can follow him on Twitter at @raylehmann.