Welcome to the fourth edition of the R Street Institute’s Insurance Regulation Report Card, our annual examination of which states do the best job of regulating the business of insurance.
R Street is dedicated to: “Free markets. Real solutions.” Toward that end, the approach we apply in this annual survey is to test which state regulatory systems best embody the principles of limited, effective and efficient government. We believes states should regulate only those market activities where government is best-positioned to act; that they should do so competently and with measurable results; and that their activities should lay the minimum possible financial burden on policyholders, companies and ultimately, taxpayers.
There are three fundamental questions this report seeks to answer:
- How free are consumers to choose the insurance products they want?
- How free are insurers to provide the insurance products consumers want?
- How effectively are states discharging their duties to monitor insurer solvency, police fraud and consumer abuse and foster competitive, private insurance markets?
The insurance market is both the largest and most significant portion of the financial services industry to be regulated almost entirely at the state level (health insurance benefits are something of an exception, as they increasingly come under federal regulation). While state banking and securities regulators largely have been preempted by federal law in recent decades, Congress reserved to the states the duty of overseeing the “business of insurance” as part of 1945’s McCarran-Ferguson Act.
On balance, we believe states have done an effective job of encouraging competition and, at least since the broad adoption of risk-based capital requirements, of ensuring solvency. As a whole and in most individual states, U.S. personal lines and workers’ compensation markets are not overly concentrated. Insolvencies are relatively rare and, through the runoff process and guaranty fund protections enacted in nearly every state, quite manageable.
However, there are certainly ways in which the thicket of state-by-state regulations leads to inefficiencies, as well as particular state policies that have the effect of discouraging capital formation, stifling competition and concentrating risk. Central among these are rate controls.
While explicit price-and-wage controls largely have fallen by the wayside in most industries (outside of natural monopolies like utilities), pure rate regulation remains commonplace in insurance. Some degree of rating and underwriting regulation persists in nearly every one of the 50 states. This is, to a large degree, a relic of an earlier time, when nearly all insurance rates and forms were established collectively by industry-owned rate bureaus, as individual insurers generally were too small to make credible actuarial projections. McCarran-Ferguson charged states with reviewing the rates submitted by these bureaus because of concerns of anticompetitive collusion. With the notable exception of North Carolina, rate bureaus no longer play a central role in most personal lines markets, and many larger insurers now establish rates using their own proprietary formulas, rather than relying on rate bureau recommendations.
Regulation also may, in some cases, hinder the speed with which new products are brought to market. We believe innovative new products could be more widespread if more states were to free their insurance markets by embracing regulatory modernization. The most recent illustration of this challenge can be seen in the approaches different states have taken to enable the timely introduction of commercial and personal policies to cover risks associated with ridesharing, as well as the more limited initiatives in some states to foster private options for flood insurance. We believe an open-and-free insurance market maximizes the effectiveness of competition and best serves consumers.
For this year’s report, we have adjusted the weightings of some categories and incorporated new data sets into our analysis, most notably in the use of capitalization ratios to gauge the solvency of property/casualty insurance markets. We also have jettisoned some factors – such as last year’s category tracking states’ adoption of various “regulatory modernization” initiatives – whose measurement, we concluded, ultimately required too many subjective judgment calls.
The changes no doubt alter the how some states would otherwise score, but a greater portion of the sometimes significant changes in this year’s grades are a reflection of what appears to be notable shifts in the landscape of state insurance regulation. Reviewing the data on insurance in 2015, we see a mix of positive and negative trends.
States that for, for years, allowed excess risk to build up on the backs of taxpayers, such as Florida and Louisiana, have made profound progress in shrinking the size of their residual property insurance markets. The shift in Florida has been so notable, including the success of the “glide path” to bring the state-run Citizens Property Insurance Corp. back to actuarially appropriate rates, that we have reassessed how to score the rate-making freedom that state now extends to private insurers.
Even in the dysfunctional Michigan auto insurance market – where a misguided version of the “no fault” system requires all auto insurers to pay uncapped lifetime medical benefits – we can see light at the end of the tunnel. Reform efforts once again gained momentum, before ultimately falling short. But perhaps more notably, for the first time in years, Michigan auto insurers were able to collect more in premium than they paid out in claims.
We also see some markedly and alarmingly negative trends. To start, North Carolina’s residual markets – both in the home and auto insurance markets – continued to grow, bucking Florida’s example. Lawmakers in Texas and Hawaii also passed legislation that would allow their residual property insurance markets to grow larger still.
There was a renewed push by consumer groups and some regulators to limit the use of factors like credit, education, occupation and marital status in underwriting and rate-setting, despite demonstrated proof that these factors are predictive of risk. Relatedly, a practice that would hardly raise an eyebrow in other industries – considering the elasticity of consumer demand in setting prices – prompted a raft of regulatory bulletins and calls to ban the practice of so-called “price optimization.”
In Oklahoma, an elected insurance commissioner issued what appears to be a politically motivated threat to crack down on insurers who invoke exclusions of man-made earthquake claims in cases where the underwriters believe they were related to deep-well injections.
And even in Illinois, long a free-market beacon for allowing rates to be determined purely by market forces, the state’s General Assembly came awfully close to voting in a prior-approval system for workers’ compensation insurance.
The regulatory landscape is changing. We hope this report captures how those changes may impact both the industry and insurance consumers in the days to come.
With the latest round of climate talking getting underway, all eyes are on Paris. Yet back in the United States, states are already considering how to reduce greenhouse gas emissions. Under the final version of the Clean Power Plan (CPP), published in October, states are required to reduce carbon dioxide emissions from existing power plants by 32 percent (from 2005 levels) by 2030.
To meet the CPP’s emissions goals, states have a variety of options, from efficiency mandates to cap-and-trade. There is, however, one compliance option that would not only reduce emissions, but would also allow states to finance needed tax reform. As the Environmental Protection Agency notes in the final rule, a state could comply with the CPP by imposing “a fee for carbon emissions from affected EGUs” sufficient to achieve the required reductions. Revenue generated from this fee could then be used to offset cuts to existing, more burdensome taxes.
To get a sense of how much money we are talking about, I took a look at EPA modeling data on the carbon price each state would need to impose to meet its CPP 2030 goals. This price varies considerably between states. Many New England states, for example, would require no carbon price at all, indicating that those states are already on track to meet their CPP goals. In other states, the price is above $20 a ton.
The amount of revenue each state would get annually from a CPP-compliant carbon fee is in many cases considerable. The highest annual revenue is generated by Texas ($2.5 billion), followed by Illinois ($1.6 billion), Florida ($1.3 billion) and Ohio ($1 billion).
For states where meeting CPP goals requires a higher carbon price, a carbon fee for electrical generation could generate substantial revenue for tax relief. Revenues from a CPP-compliant carbon fee exceed many individual state taxes. In Texas, for example, revenue from a CPP-compliant tax is significantly greater than revenue from the state’s tax on natural gas production, all cigarette and alcohol taxes combined, would be more than half of revenue collected from the state’s franchise tax and third quarters of the state’s gasoline tax. Many other states would be able to reduce or eliminate state corporate, gasoline or other taxes if they adopted a tax-swap approach.
In a recent report, I looked specifically at some of the ways Texas might implement a carbon fee approach. While Texas is one of the handful of states without a state income tax, it still has several economically damaging taxes, such as the business-franchise tax, that revenue from a carbon fee could be used to eliminate. The state could also use revenues to offset a portion of the state’s sales tax, which is particularly regressive. Properly designed, a state could implement a system that guaranteed all revenue generated from a carbon fee are passed on to taxpayers without growing government. While focused on Texas, these ideas are obviously applicable to every state that must implement a carbon reduction plan.
A wide variety of economist and activists, from Nobel Prize-winning economist Gary Becker to climatologist James Hansen, have endorsed carbon fees as the most efficient way to reduce greenhouse-gas emissions. And because the fee approach provides the opportunity for tax relief, it blunts the economic impact of the CPP in a way other plans do not.
Green flags emblazoned with a yellow circle encompassing twin Xs are an increasingly common sight in the Gold Country. That standard belongs not to a county or a current state in the union, but rather to a would-be state: the State of Jefferson.
In October 1941, the original State of Jefferson movement got its start. Local officials from counties along the Oregon/California border proposed the idea of creating a new state, independent of the distant leadership of either Salem or Sacramento. Empowered locals took enthusiastically to the idea and, in late November of that year, set-up a road block on Route 99 near Yreka to distribute copies of Jefferson’s “Proclamation of Independence.”
In spite of their fervor, the December attack on Pearl Harbor and the ensuing outbreak of World War II effectively doused the quiet rebellion of the Jeffersonians as national unity was prized over regional pride.
Now 75 years later, a resurgent State of Jefferson movement is seeking to found a new state encompassing not only the border counties of southern Oregon and northern California, but also counties as far south as Placer and El Dorado. In part because of that expanded footprint – Jefferson would be the 18th largest state in the U.S. – the movement has successfully gained not only notoriety, but also limited political success.
County governments in Siskiyou, Modoc, Glenn, Yuba, Tehama and Sutter have all adopted resolutions on the theme of withdrawing from the State of California. Lake and Lassen county supervisors, meanwhile, have submitted similar questions about devolution to their electorates. In each case, representational concerns are at the center of the calls for independence.
At both the national and state levels, the area that would make-up the State of Jefferson is subject to control from bodies in which its level of representation is minimal. For instance, in California, by the most generous tally of state legislative districts and the broadest understanding of Jefferson’s boundaries, the would-be state has six Assembly Districts and three Senate Districts in chambers of 80 and 40, respectively.
The consent of the governed is difficult to appraise when, as a matter of population, the governed are more removed from their state senator (district population of 931,349) than they are from their national member of Congress (704,566). But that is a statewide problem in California.
Specific to Jefferson, while proportionally represented at the state level, the sheer size of its proposed boundary underscores the intuitive sense of under-representation that advocates for its creation feel at the federal level. Living in a predominately rural region, the voices and concerns of would-be Jeffersonians are under-represented in the U.S. Senate when compared to their rural neighbors in Nevada and Idaho.
But while the counties of northern California and southern Oregon have a legitimate gripe when it comes to their influence in Washington, D.C., the legal obstacles confronting the creation of Jefferson are substantial. Not the least of which would be convincing both legislatures to assent to the departure of the disaffected counties.
Barring a major shift in the political landscapes of both California and Oregon, the State of Jefferson will remain consigned to the imaginations of those who envision its creation. Yet, whether or not Jefferson becomes the 51st State, the movement’s crystallization of concerns about the voice of the North State and the Gold Country is a success in itself.
Every year, various publications wish their readership a happy and healthy Thanksgiving. Some go further. They provide their readership with advice about how to navigate political conversations around the Thanksgiving table.
Many of those columns focus on maintaining a serene path into the holiday season, while others focus on the best pithy ways to evangelize. Or, failing that, to “shame/destroy/eviscerate” those at the table with whom they disagree.
This piece, unlike those, is simply a collection of gifs designed to do no more than capture the feelings of a libertarian-minded guest when various political topics arise.
In the name of the Thanksgiving spirit, I give you: “R Street at the Thanksgiving table.”
Things will start off pleasant. Everybody can find a way to get along for at least 15 minutes while waiting for dinner:
Invariably, at some point, the presidential election will come up;
The always important “polls” will be discussed. At which point, your hitherto irrelevant knowledge of the RealClearPolitics average and fivethirtyeight.com tracking will be of some use:
Regardless which candidate is discussed, the libertarian position will be well outside the table’s mainstream and you’ll end up disappointed:
Still, in that process, someone might ask you what libertarianism is really about. You’ll do your best to explain:
…and the table won’t like it:
You may have a chance to discuss specifics, like cutting government funding for both “Obamacare” and Medicare. Others will disagree:
But some of your ideas might catch on. Like, maybe we can have a free and open Internet and security at the same time?
If they don’t, you can always change the topic to something everybody agrees upon:
From everybody at the R Street Institute, we wish you and your friends and family a happy Thanksgiving.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
The Pennsylvania Legislature is having to act fast to settle on a way to regulate transportation network companies like Uber and Lyft. That’s because administrative law judges for the state’s Public Utility Commission have recently recommended a mind-boggling $50 million fine against Uber.
Pennsylvania has proven a tricky state for TNC operations. In 2014, both Uber and Lyft began business in the Keystone State, before law and regulation had an opportunity to clarify their legal status. Philadelphia, the largest city, promptly outlawed the services outright and actively began to combat their presence by impounding vehicles. For its part, the PUC chose to establish a regulatory baseline and grant two-year provisional licenses to the services, valid in 66 of the state’s 67 counties (all except Philadelphia County, which shares the same boundaries as the city).
Almost a year after Uber began business in the state, the PUC has handed down the record fine on the basis of the six months in which Uber operated in the state before the two-year provisional licensing period began. The two administrative law judges recommending the fine claim that Uber’s behavior “warrants a serious penalty to deter future violations.”
The specter of the huge fine, while daunting, may have had a salutary effect on the long-term viability of TNCs in Pennsylvania. Before it was levied, ongoing efforts to legalize TNC activity on a statewide basis repeatedly stalled in Harrisburg. But following news of the fine earlier this month, the state Senate found a way yesterday to pass to the House of Representatives a bill that would legalize the services.
Senate Bill 984, sponsored by state Sen. Camera Bartolotta, R–Monongahela (who enjoyed a career as an actress before joining the Senate, appearing in films such as the 2014 teen romance “The Fault in Our Stars”) passed the body 48-2 and would establish insurance and safety standards for TNC services.
The insurance requirements contemplated by the bill, ($50,000 per-person and $100,000 per incident for bodily injury and $25,000 for physical damage) are reasonable and in keeping requirements throughout much of the rest of the nation. The background check requirements are similarly standard. Overall, the bill has many of the same characteristics as the insurer/TNC “national compromise” language first presented at the Phoenix meeting of the National Association of Insurance Commissioners.
Session will reconvene in Harrisburg Dec. 2. At that point, since the session is set to end Dec. 9, the House will need to act quickly to pass the bill.
Unfortunately, even if approved before the end of session, the legislation would have no retroactive legal bearing on the fine. Still, there is no doubt that it would give pause to the PUC as it decides whether or not to approve and pursue that measure to a decision. For that reason alone, the Pennsylvania Legislature should pass S.B. 984.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
There was no such thing as a self-driving car in 2003. That’s when the Defense Advanced Research Projects Agency announced its first Grand Challenge, with a $1 million prize for the first robotic vehicle to complete a course from California to Nevada in less than 10 hours.
In the eight years since the last DARPA challenge, self-driving car research has exploded. Today, nearly every car company is working to develop autonomous cars, from Ford and Tesla to Google and maybe Apple. Fully self-driving cars may be here within the next five to seven years, and much of the credit belongs to the DARPA challenges.
The idea of awarding prizes for private action, sponsored either by public or private entities, is at least as old as the patent system. Qui tam statutes, going back to the 1300s, allowed a private citizen to bring action on behalf of a government to recover a penalty, while the first known patent was in Venice in the 1400s.
One example of qui tam statutes from U.S history was the False Claims Act of 1863, also known as the “Lincoln Law,” enacted during the Civil War for the purpose of combating fraud. The original False Claims Act entitled those who pursued funds for which the federal government had been defrauded to half of any money recovered. In a recent paper for the R Street Institute, I propose a federal program to create a novel, self-funded prize that would both spur innovation and save taxpayers money.
Still currently in the developmental phase, new technologies like 3-D-printed kidneys not only would revolutionize medicine, but also could have a major impact on federal spending.
More than 400,000 Americans are currently on dialysis as they await kidney transplants. Each dialysis patient costs Medicare $700,000 per year. If 3-D-printed organs made of our own stem cells (thus ensuring they wouldn’t be rejected) were to become as ubiquitous in hospitals as blood supplies are today, not only would hundreds of thousands of lives be immeasurably improved, but taxpayers could save as much as $500 billion in just 10 years.
While the National Institutes of Health (NIH) currently spends $549 million each year on kidney disease research, its budget for 3-D technologies is only about $4 million. In addition to sparse funding, the problems associated with correctly developing the techniques for 3-D-printed organs may not be patentable inventions. They may be iterative solutions to small problems, few or none of which can receive a 20-year monopoly.
We will eventually develop 3-D-printed organs, but with proper incentives, it’s possible we could speed that development from a generation away to less than a decade.
Under the “innovation savings program” I propose, if researchers developed 3-D-printed kidneys, and this technology was shown to save the federal government money, the team would receive a portion of those savings. The NIH also could work with scientists to identify the major impediments to developing 3-D-printed organs and divide potential awards among those who solve those discrete problems.
There are, to be sure, kinks to work out. The program would have to be overseen by a competent and independent agency, and there would need to be effective legislative oversight—including from the Government Accountability Office—to ensure any awards are granted based on proper accounting and transparent processes. Federal agencies also would need an incentive to cooperate, perhaps by allowing them to retain a small portion of the savings as unrestricted funds.
Historically, prizes have been a powerful tool to spur innovation. The federal government can learn from what has worked for the past 500 years. We should be leveraging all tools at our disposal to solve our nation’s problems and a self-funded prize for innovation is an easy way to start. It has the added benefit of being free.
Speaker Paul Ryan
H-232, The Capitol
Washington, D.C. 20515
Majority Leader Mitch McConnell
S-230, The Capitol
Washington, D.C. 20510
Dear Speaker Ryan and Majority Leader McConnell,
As you begin negotiations over legislation to continue government funding past December 11, 2015, we the undersigned individuals and organizations urge you to continue the policy contained in recent appropriations bills restricting the use of Obamacare’s “Risk Corridor” program.
Many of us signed on to a letter last year describing the Risk Corridor program (Sec. 1342 of the Patient Protection and Affordable Care Act, better known as “Obamacare”) in detail and outlining why we believed it was important to restrict its ability to serve as a “taxpayer bailout” for Obamacareparticipating insurance companies. Fortunately, Congress was able to insert such language into the last omnibus appropriations act (specifically Division G, Title II, Sec. 227 of P.L. 113-235).
In last year’s letter, we pointed out that the experience of insurers in the new exchanges would likely lead to them demanding much more in returns from the program than they were putting into it. That prediction has turned out to be true. On October 1, the Department of Health and Human Services (HHS) announced that they would only be able to pay out $362 million of the requested $2.9 billion, or just 12.6%, of funds that Obamacare-participating insurers had requested. Absent the Sec. 227 language mentioned above, HHS may very well have simply filtered the difference of $2.538 billion from hardworking taxpayers to bailout insurers for their poor business decisions.
Among other things, Obamacare is about hiding costs and shifting costs, not about lowering them. The Risk Corridor program represents a microcosm of the law, and one of its most insidious provisions, as it attempts to hide the true costs of Obamacare from insurance companies and beneficiaries, and instead spread it out among hardworking taxpayers. Eliminating the Risk Corridor program’s ability to do this represents a major blow to the law and a step towards increased transparency in Obamacare’s exchanges.
As Obamacare’s exchanges continue to struggle, we know the Administration is looking for any and all avenues to try to mask and hide those failures, both for political reasons of public perception and for practical reasons of trying to help a doomed program limp along.
We also know insurance companies and their lobbyists are pressuring the Administration and Congress to release the common-sense restriction placed on the Risk Corridor program by the Sec. 227 language. However, taxpayers should not be on the hook for any more of Obamacare’s failures, and so we urge you to ensure that their voices prevail by continuing to include language preventing Risk Corridors from becoming a taxpayer bailout in any future appropriations bill. Failure to continue this policy would represent a devastating roll back of this important conservative victory.
In addition, we urge you to eliminate or limit a related provision: Obamacare’s “reinsurance program” (Sec. 1341 of PPACA). Similar to the risk corridor program, Obamacare’s reinsurance program is not a traditional reinsurance program, but rather is structured in a way that artificially props up Obamacareparticipating insurance companies. In brief, rather than transferring money within a pool of insurers or insurance products, Obamacare’s reinsurance program taxes people with non-Obamacare group health plans to transfer funds to insurers participating in Obamacare’s exchanges. Putting a stop to this program would further reduce the Administration’s ability to hide the true costs of Obamacare.
Thank you for your consideration.
Michael A. Needham, CEO, Heritage Action for America
Grover Norquist, President, Americans for Tax Reform
Phil Kerpen, President, American Commitment
Heather Higgins, President and CEO, Independent Women’s Voice
Sabrina Schaeffer, Executive Director, Independent Women’s Forum
David McIntosh, President, Club for Growth
Brent Gardner, Vice President of Government Affairs, Americans for Prosperity
Adam Brandon, President and CEO, FreedomWorks
Jenny Beth Martin, Co-Founder, Tea Party Patriots
Ken Hoagland, Chairman, Defend America Foundation
Thomas Schatz, President, Council for Citizens Against Government Waste
Dean Clancy, Partner, Adams Auld LLC
Eli Lehrer, President, R Street Institute
Gregory T. Angelo, President, Log Cabin Republicans
Eric Novack, Chairman, US Health Freedom Coalition
Dan Perrin, President, The HSA Coalition
Norm Singleton, President, Campaign for Liberty
John R. Graham, Senior Fellow, National Center for Policy Analysis
Greg Scandlen, Principal, Health Benefits Group
Twila Brase, President, Citizens’ Council for Health Freedom
Andrew Langer, President Institute for Liberty
Chris Conover, PhD, Adjunct Scholar, American Enterprise Institute
Beverly Gossage, President, HSA Benefits Consulting
Donna Hamilton, Virginians for Quality Healthcare
Marc Short, President, Freedom Partners
Gov. Gary Johnson, Honorary Chair, Our America Initiative
Jeffrey A. Singer, MD, FACS
The Washington state Supreme Court on Sept. 4 rule the state’s charter school law as unconstitutional. The justices dug deep to justify their decision, referencing a definition of public schools from a 1909 case, School District 20 vs. Bryan. Instead of citing a particular right spelled out in the U.S. Constitution or Washington state’s constitution, the court based its ruling largely on its own, distinctive interpretation of the term “common schools.”
The ruling essentially claims charter schools are not public schools, which could not be more blatantly false. Charter schools are public schools that have somewhat more autonomy than traditional public schools. Most states now have charter school laws on the books, so Washington’s law was not some kind of weird experiment, but rather right in line with other programs dozens of states and cities have already implemented.
The court ruling is based on the absurd premise that charter schools are not accountable to taxpayers because they are not run by elected school boards. But the state’s 2012 charter law came into being because of a ballot initiative voted on directly by — you guessed it — the taxpayers of Washington state. They gave their approval at that time.
Unlike traditional public schools, charter schools are also directly accountable to the parents of the children who attend them. Charter schools typically close within three years if they are not doing a good job. Failing public schools just go on and on, dooming more children to a poor education. The teachers unions and their allies who sued to stop the state’s charter law are forcing those students to remain trapped in their failing schools. Just who is it that’s acting as if they’re not accountable to the taxpayer here?
It was particularly irresponsible for the court to delay making this decision until the school year was about to start, thus leaving hundreds of students in the lurch. Again, just who is it that’s acting as if they’re not accountable here?
Liv Finne, director of education studies at the Washington Policy Center, notes the people of Washington passed the charter school law through the ballot initiative process because they wanted serious educational reform. The court is denying them their right to decide how their schools should be structured.
“Just as schools across Washington open their doors to students, the state Supreme Court placed school reform in serious jeopardy,” Finne said. “For technical reasons, the court struck down the charter school law passed by voters in 2012. The state teachers union — the Washington Education Association, which funded the lawsuit against the charter school law — celebrated the ruling.”
Finne says the state’s teachers unions have undue influence over education policy in Washington. She’s obviously right.
“The ruling has shocked and upset the parents and families of the 1,300 children enrolled in one of Washington’s nine new charter schools,” said Finne. “Questions are now being raised about union influence on the Supreme Court. Public records show seven of the nine Supreme Court judges took maximum contributions from the state teachers union during their election campaigns.”
The technical fixes necessary to correct this ridiculous ruling are simple: either change or remove the term “common schools” from state law or rewrite the definition of the term to include charter schools, which are, as noted earlier, public schools. That just happens to be what the voters of Washington have expressly communicated they want. Since the state’s courts won’t do the right thing for Washington’s children, it’s up to the Legislature to do so.
The court made a disappointing decision in this case, and parents, teachers and taxpayers will all have to stand up and demand more.
Dear Member of Congress:
As the 2015 session winds down, lawmakers are seeking a variety of “pay-fors” to offset the costs of legislation whose passage is deemed urgent. Although many of these bills may be worthy endeavors in their own right, the undersigned organizations urge you to pursue spending reductions rather than revenue increases for such purposes. We further caution you to avoid employing revenue-raisers in the service of random, unrelated bills, whatever the merits of those bills may be. One of many examples would be to slap a tax hike on foreign reinsurance –a critical product that balances risk in the insurance system to the benefit of policyholders. This provision, often characterized as a “deduction disallowance for non-taxed reinsurance premiums paid to foreign affiliates,” would amount to little more than a thinly disguised tariff proposal that could impose enormous costs on consumers and limit international trade.
The proposal, which Rep. Richard Neal, D-Mass., has pushed aggressively for years and has the support of President Barack Obama, simply penalizes non-U.S. headquartered companies for a normal business practice. All insurers that operate internationally are “groups” of related companies that cooperatively manage financial resources in order to insure risks around the world. Under the Neal scheme, these ordinary business transactions would be slapped with a large tariff that would substantially raise costs for non-U.S. insurers. While current tax laws treat U.S. and non-U.S. companies slightly differently, there is no “loophole” for non-U.S. companies. Indeed, in some cases they pay higher effective taxes than their U.S. counterparts. From a policy perspective, the primary underlying premise of the Neal plan is protectionism.
And, for consumers, the consequences of this plan would be devastating – the Brattle Group has estimated that the consumers’ costs for insurance could rise by $130 billion over 10 years. This would trickle down into the prices of everything from airline tickets to food. Meanwhile, the tax could bring much less to the Treasury than anticipated. According to a Tax Foundation analysis, the downstream effects of the policy would be so adverse that “[o]ver the long term, the tax provision reduces GDP by about twice the revenue it collects directly. As a result, about 40 percent of the intended revenue from the provision ends up being lost through lower collections of other taxes.”
Just as importantly, the structure of the proposal might well violate the United States’ obligations with regard to the World Trade Organization. This, in turn, could result in other countries slapping retaliatory tariffs on American goods and services. The result, quite literally, could be a trade war.
At a time when systemic tax reform is becoming more imperative, it is especially critical for Congress to avoid embedding further distortions into the law that will have long-term drawbacks and make the task of simplification even more difficult. For all the foregoing reasons, we hope you will reject a reinsurance tax hike or anything like it.
Eli Lehrer, President, R Street Institute
Pete Sepp, President, National Taxpayers Union
Steve Pociask, President, American Consumer Institute
Tom C. Feeney, President and CEO, Associated Industries of Florida
David Williams, President, Taxpayers Protection Alliance
Last month, AB InBev and SABMiller announced they had agreed to join forces. The proposed $106 billion deal would unite the makers of two of the best-known American lagers, Budweiser and Miller. Together, the two firms would account for a third of the world’s beer output and half the beer industry’s profits.
The deal is not particularly surprising, as beer mergers are frequent. AB InBev itself was the product of multiple mergers. Brahma and Antarctica combined into AmBev in 1999 and AmBev became InBev in 2004 by merging with Interbrew, the Belgian company best-known for Becks and Stella Artois. (Interbrew, by the way, was formed in 1988 through Stella’s acquisition of Piedboeuf Brewery.) In 2008, InBev bought Anheuser-Busch and AB InBev was born.
SABMiller, likewise, is the product of multiple mergers and complex deals. It formed in 2002, when South African Breweries bought Miller Brewing from Altria, the U.S. tobacco company. Canada’s Molson and Colorado’s Coors merged in 2005, and SABMiller partnered with Molson Coors Brewing Co. to establish MillerCoors in 2007.
The AB InBev-SABMiller deal has made some beer drinkers anxious. Lovers of Miller and Miller Light may wonder, “Will Bud kill off these competitors to Bud and Bud Light?” Other observers fret the merger will produce a big beer monopoly.
Neither of these outcomes will occur. AB InBev is jettisoning Miller in the process. The agreement requires SABMiller plc, a London-based beer conglomerate, to sell its stake in MillerCoors. The beneficiary of this divestiture is Molson Coors Brewing Co., which would become the outright owner of the U.S. breweries that make Miller beers. AB InBev’s portion of the U.S. market will not increase.
SOURCE: Beer Marketer’s Insights, 2014
The objective of this deal is not to increase its domestic market share. Per-capita North American and European demand for alcoholic beverages has declined generally since 1980, and wine and spirits have nibbled at beer’s control of the cup. Beer now accounts for less than 50 percent of alcoholic beverages purchased domestically. Craft brews, which are growing by leaps and bounds, also have eaten into big beer’s market share. Last year, Bud’s chunk of the U.S. beer market slid 10 percent, from 50 percent to 45 percent. Some 4,000 breweries are operating in America today.
Instead, the merger’s aim is to expand AB InBev’s business in markets outside America. Emerging markets are where the profits are. SABMiller earns 72 percent of its profits in places like Africa and South America. Thus, it is the SAB portion of MillerSAB that is of real interest to AB InBev, as owning it gives the company access to the growing African market.
Some in Congress are worried about the deal. Legislators fret over possible job losses due to brewery consolidations. Whether any such thing will happen is anyone’s guess, and quite frankly none of Congress’ business. A few senators have sent a letter to the Department of Justice. It is a bit of a head-scratcher. It notes that craft beer is booming, with 3,739 of them in business. The letter then complains that big beer is engaged in a “dangerous plan to constrain distribution channels.” The missive offers no evidence of vertical monopoly building. Again, the two big beer companies have lost market share.
If Congress really wanted to ensure the beer business remains competitive, it should hold hearings on state government practices that reduce consumer choice. The continued requirement that brewers sell their beer to distributors, who then sell it to the public, is one such policy. It permits wholesalers to become gatekeepers. So, too, are the corrupt franchise rules, which stifle choice by locking retailers into agreements with distributors.
Before the AB InBev deal is completed, it will be subject to Justice Department review. Section 7 of the Clayton Act forbids mergers or acquisitions that could diminish competition. With AB InBev’s share of the U.S. market staying the same, it’s hard to see how the DOJ could reasonably object.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
It’s time for a truly progressive approach to insurance regulation in California. Unfortunately, the state’s deeply Democratic blue politics conceal an unexpected pocket of regulatory conservatism.
California adopted Proposition 103 in 1988, setting in legal stone how the state approves certain insurance rates. The result has been tremendous opportunity cost for California consumers, as other states have pursued systems that allow a much faster pace of product innovation and approval.
This isn’t exactly a surprise. Prop. 103 was approved when President Ronald Reagan still sat in the White House. The law reflects the prevailing wisdom of the period, during which insurance rates were rising unceasingly. It sought to prevent insurers from raising their rates and, in the process, also ensured they’d almost never cut them.
Perhaps without completely understanding what they were voting for — there were five insurance measures on the 1988 ballot — Californians cemented in place a law that prevented their rates from declining as the state’s insurance cost drivers began to ebb.
Even early on, Prop. 103 proved to be the antithesis of the sort of smart, efficient and responsive governance that contemporary Californians seek to empower. Its legacy has continued that theme.
In fact, though touted as a consumer-protection law, Prop. 103 has effectively shackled the California Department of Insurance and its current elected head, Dave Jones, to a system over which they have limited control. The CDI’s best efforts to be quick, nimble and flexible in its cultivation and approval of rate changes are frustrated by Prop. 103, which makes a reasonable speed-to-market virtually impossible.
In a recent study completed by the R Street Institute, comparing California’s rate-approval process to that of other states, the effect of Prop. 103 jumps off the page. California has fewer rate filings (one-third as many as Illinois and half as many as New York) and a slower speed-to-market (according to some measures, by orders of magnitude) than any of the other states examined.
Efforts to improve Prop. 103 have been stymied and confused by bafflingly conservative rhetoric from quarters typically associated with reform. The “consumer-protection industry” is keen to double down on the nonexistent benefits of Prop. 103, because the regime it created provided them with a steady flow of cash.
California is the only state that allows private parties to intervene in insurance rate-making proceedings. The purported savings achieved by this redundant process are hard to quantify, particularly when placed in the context of the chilling effect it has had on the market as a whole. What’s certain is that intervenors are well-compensated for their time and have slowed rate approvals to an embarrassing crawl.
A process that takes 26 days in Nebraska, 55 days in Washington and 58 days in New York takes a whopping 139 days in California. In exchange for the delay, California enjoys auto-insurance rates that are higher than all of those states. In fact, they are the seventh-highest in the nation.
Is it any wonder that, last year, Californians overwhelmingly rejected Proposition 45, an effort to extend this system to the health insurance market? Which raises the question: Is Prop. 103, as it exists today, something a progressive should support?
If he or she believes laws should be written and executed for the benefit of special interests rather than the state as a whole; that regulation should limit choice; that it should be shifted to private hands and innovation should be slowed to a crawl, then the answer is yes.
Fortunately, the answers to every one of those questions is no. A truly progressive approach would benefit all Californians. Whatever that approach is, it would not look anything like Prop. 103.