HOA Watchers

Chis Tobe touches on two topics, state regulation of insurance and transparency, that I have long been interested in, and particularly these days.

Below are excerpts from the article along with an example of how this dysfunctional pairing is impacting me.

We have 50 separate regulators, each with its own budget constraints, political pressures, industry relationships, and transparency standards. 

While insurance regulation is technically state-based, the NAIC writes the model laws, develops solvency standards, drafts accounting rules, and coordinates national policy. State regulators almost uniformly adopt NAIC models. When NAIC moves, the states follow.

The NAIC is not a federal agency. It is a standard-setting body composed of state regulators. It is deeply influential, yet structurally private.

Public confidence in solvency regulation matters more than ever.  If regulators are doing strong work, transparency strengthens them. If regulators are under pressure, transparency protects them.

Insurance regulation in America has always been decentralized. That is unlikely to change. But decentralization does not require opacity.

Transparency is not a threat to insurance regulation. It is the only way to preserve trust in it.

Now to my story.

State regulators of insurance are not your friend. Roughly 2.5% of every premium dollar is kicked back to state governments through premium taxes supposedly to pay for the cost of regulation but it is primarily used for states’ general fund with most states abiding lax regulation since higher insurance premiums, for budget purposes, are their friend.

I do not believe transparency will help this situation unless people understand how insurance rates are determined – by business concerns. Insurance companies primarily use ISO (Insurance Services Office, now part of Verisk) rates as advisory loss costs and rating factors to develop their own premium pricing models. They adopt or modify these prospective loss costs—derived from aggregated industry data on premiums and claims—to project future expenses, apply loss cost multipliers, and file rates with regulators. Among the modifications are trend and loss development factors that inflate liabilities.

If an insurer wants higher rates they use higher factors and state regulators rubber stamp them. If an insurer wants lower rates, in cases where they want to enter a market through under-pricing, they advertise that some state won’t let them lower rates and state regulators rubber stamp them.

This state of affairs is of particular interest to me now since the master insurance policy for our condominium association is up for renewal next month and our insurance agency last October was bought by Hub International which is controlled by Hellman & Friedman, a private equity firm, with Leonard Greene & Partners, another private equity firm, having an additional substantial ownership interest. I’m expecting to get 30% increases and stories about Florida condominium collapses. I’m not expecting Connecticut to do anything about it except collect their cut.

And as for transparency. Welcome to my private hell.