Amid COVID, Insurance coverage Regulation Stays Worthwhile


The COVID-19 pandemic hit national budgets particularly hard in 2020 as tax revenues fell by $ 24.11 billion from 2019. Analysis of the National Association of Insurance Commissioners (NAIC) data, however, shows that insurance regulation remained a profitable source of income for the states, generating budget surpluses of $ 3.29 billion in the 50 states and the District of Columbia, versus $ 2.94 billion in 2019.

According to data from the Federation of Tax Administrators, total state tax revenues fell 2.2% from $ 1.090 trillion in 2019 to $ 1.066 trillion in 2020, with Utah (down 12.4%), North Dakota (down 12.8%) and Alaska (minus 26.0). %) hardest hit. In total, 31 states and the District of Columbia saw a drop in tax revenue, with California alone bringing in a steep $ 16.27 billion.

In contrast, the NAIC’s 2020 Insurance Department Resources Report shows that state insurance divisions generated $ 3.77 billion and $ 1.07 billion in other “miscellaneous” income, state insurance divisions generated $ 5.03 billion in total revenue, more than three times the $ 1.60 billion they actually spent on insurance regulation.

This “regulatory surplus” of $ 3.43 billion (an 11.8% increase from $ 3.07 billion in 2019) must be weighed against the $ 140.8 million in funds which the insurance departments obtained from the general funds of their states, itself an increase of 5.4% compared to 2019. But even after deduction, insurance regulation remained with a surplus of 3.29 billion.

A tax with a different name

Insurance department revenues – be it fees and levies, fines or funds from other sources – should not be confused with the taxes states levy on insurance premiums. All states levy taxes on premiums paid in that state, and most also levy “retaliation taxes” by charging foreign insurers at the rate set by their country of residence if it is higher than the rate in the jurisdiction in which the premium is paid . The existence of retaliatory taxes forces most insurers to move to relatively low-tax jurisdictions. The states with the highest and lowest effective premium tax rates in 2020 are shown in the graph above.

Premium and retaliation taxes, like other sales taxes, are deposited in the general fund of a state. Kansas is a partial exception in this regard, as the Kansas Department of Insurance may withhold 1% of the premium tax collected and show it as “other” income. As shown in the graph below, premium taxes have been a stable and largely recession-proof source of income for the states, increasing 61.7% over the past decade, from $ 14.82 billion in 2011 to $ 23.97 billion in Year 2020.

However, as mentioned earlier, the fees and fines levied by insurance departments are significantly higher than the amounts strictly necessary to support regulatory activities. In 2020, only seven state insurance divisions (North Carolina, Arizona, Maryland, Hawaii, Minnesota, Michigan, and Tennessee) had less revenue than the sum of their regulatory expenses and their state’s general fund income. In fact, total state spending on insurance regulation in 2020 ($ 1.36 billion) was only 31.8% of the revenue generated by insurance regulators.

The rest – the so-called “regulatory surplus” – amounts to a hidden tax from insurance companies, which is ultimately passed on to consumers in the form of more expensive cover.

Follow the money

State insurance departments differ in how their budgets are structured and what happens to the funds raised by regulators. A slight majority of states (27 total) use “dedicated” households, where income goes into a separate account that is carried over from year to year. If the income accruing to the account exceeds the budget made available by the state parliament for this year, the surplus is carried over to the following years and can be used to cover future deficits of the ministries.

Theoretically, the advantage of a dedicated financing system is to reduce cyclical fluctuations in sales. For example, a department could collect large fines and penalties that serve as a one-off windfall. For example, Texas reported that $ 19.2 million of the $ 67.6 million in fines and penalties the state had incurred in 2020 came from a single entity, while Vermont found a major settlement 1 , Was $ 8 million of the reported $ 2.2 million in fines.

A special funding budget should theoretically also reduce the need for a department to either cut expenses or to draw general funds from the state treasury. However, as the following table shows, there are some discrepancies between this theoretical representation and the real-world performance of departments with dedicated budgets.

It is evident that the vast majority of budgeted states – 24 of the 27 – have had more income than they spent on insurance regulation in each of the past five years. Two other states, Hawaii and Michigan, both had deficits over the past five years. Only Maine and Maryland actually performed as the theoretical calculations would predict, with deficits in a few years and surpluses in others.

In addition, some of the surpluses are really enormous. The five-year accumulated surplus of $ 2.81 billion that New York generates or the five-year surplus of $ 1.09 billion that Texas generates cannot reasonably be called a regulatory “rainy day fund”. Both states are obviously overwhelming insurers and insurance producers with regulation and license fees.

The theoretical calculation that four of the federal states with dedicated insurance department budgets have received at least part of the funds from the state treasury in the last five years is also undercut, although all four report surpluses every year. Two of these departments received very limited general funding, none in 2020. (Oklahoma received $ 1.6 million in general funding in 2016, but none in the past four years. Washington State received roughly in 2016 and 2017 combined $ 500,000, but none. In the past three years.)

California, which often draws a small portion of its annual budget from the treasury, has raised $ 21.6 million in general funding over the past five years. The real outlier is North Carolina. Although the department had total surpluses of $ 35.4 million over the past five years, the department raised a whopping $ 209.8 million in general government funding over the same period.

Only 11 states received general funds from their state coffers in 2020, but they came from all four budget types identified by the NAIC: earmarked (discussed above), quasi earmarked (surpluses paid annually to the general government account), general (all operating funds allocated directly by the state) and “combination” (the department’s financial regulation provides for a combination of two or more of the other types).

While Mississippi and South Dakota are the only states that get 100% of their funding from the general fund, only Mississippi is officially classified as a “general subsidy state”. In 2017 a change came into force fees and levies of companies, from 2020 it will no longer show such funds, which are all deposited in the general account of the state.

Despite the fact that Mississippi does not report its collected regulatory fees and ratings, the budget surpluses generated by insurance regulation serve even more directly as a tax for the 23 states (and the District of Columbia) that do not have their own households. Excess funds are usually, but not always, deposited in the state treasury. There are some exceptions. Arkansas allows the department to transfer excess funds for one year, but donates any excess funds to the general fund every two years. Both Alaska and North Dakota allow their divisions to carry over $ 1 million into the following year, with the remainder being added to the general fund.

Of the states with no dedicated funding, only Arizona and Tennessee spent more on insurance regulation than they generated in 2020 revenue. Combined, this cohort of jurisdictions generated revenues of $ 2.87 billion. Less the $ 454.4 million they spent on regulation and the $ 83.5 million they used on general funding, these states benefited from a cumulative $ 2.33 billion in 2020 US dollars through insurance regulation.


Below, I list the states in order of the surplus from insurance regulation (revenue minus department operating expenses and any general funds transferred from the treasury), expressed as a percentage of the state budget.

Loss of profit due to COVID-19 legislation