How Regulation Drives up Insurance Costs

Why should companies care who regulates their insurers? Because, say corporate risk managers, state-by-state regulation causes paperwork to soar, complicates taxes, increases legal risk, and costs more.

Testifying on behalf of the Risk and Insurance Management Society (RIMS) before a House Financial Services committee hearing last month, Ochenkowski cited another point in favor of regulatory harmonization: allaying the confusion and cost of the current premium tax allocation system. Under the current regime for certain lines of insurance, confusion reigns because states have a panoply of tax remittance rules.

In some states, brokers can calculate the premium taxes owed by the insurance buyer for those lines and send the payments along to the state as part of their transaction services, the risk manager testified. “In other states, the broker may calculate the tax due, but I must send it; while in a third type of state I must calculate and send taxes,” she said.

At Jones Lang LaSalle, which operates in over thirty states and arranges the insurance for the properties it manages, the system breeds a tortuous payment chain. Ochenkowski’s department collects premiums from each property and sends hundreds of checks to the company’s broker, since the Employee Retirement Income Security Act doesn’t allow licensed advisers like Jones Lang to commingle funds from clients.

The checks each include a tax payment and a payment for the insurance. In states where the broker can’t pay taxes on behalf of the client, it divvies up the tax and insurance payment, sends a check to the real estate company for the taxes, and advises the firm on how much tax to send to each state. The firm then issues a third series of checks to pay the taxes of the various states. “We’re taking our money and sending it all around before it ends up in the state,” Ochenkowski says, noting that process adds internal administrative costs and insurance brokerage expenses.

Under the House bill, which RIMS supports, corporate taxpayers would only have to send payments to their headquarters state. That state would then distribute the payments among all the states where taxes are owed.

Insurers also make the case that buyers are losing the benefit of a large number of innovative products because some state commissioners balk at them. Fireman’s Fund, for example, has been trying to introduce a product that includes the client’s use of a data backup facility as well as insurance coverage, says Beneducci, who was wary of providing more details and thus revealing a trade secret.

The insurance company has had discussions with insurance commissioners on the product, but it’s been tough going. If only one or two states give the product the go-ahead, the company won’t be able to produce it because it would then lack economy of scale, according to the insurance executive. The current regulatory regime “flies in the face of creating a new product,” Beneducci complains. “The system favors a commoditized approach.”

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