Cash-strapped states are having a historically hard timebalancing their budgets. Over and over again, officials facedifficult–almost unacceptable choices–of cutting beneficial orvital programs, or raising revenue through direct and broad taxincreases

Seeking to avoid the need to make such difficult calls, manygovernment officials strive to identify creative ways to raiserevenues. Increasingly, the insurance industry has become thetarget of innovative efforts to close budget gaps. While notsurprising under the circumstances, these efforts are short-sightedand ill-advised.

State efforts to raise revenue from insurance can take a varietyof forms. The most direct method is to raise the state's premiumtax. This is commonly the initial action contemplated bylegislators eyeing insurers as a source of additional revenue, buttheir enthusiasm typically is muted when the legislators come tounderstand that because of retaliatory taxation, raising thepremium tax typically triggers the unintended consequence ofputting that state's domestic insurer at a competitive disadvantagein other states in which they do business.

Another common method of obtaining funds is to increase specialfees or assessments that insurers pay for various reasons, such asto fund the operations of the state insurance department. In somecases, legislators place surcharges on insurance policies to fundprograms they view as sufficiently closely related to insurance,such as policy and fire training. In other cases, state officialshave gone after insurance funds that have accumulated, such as in aresidual market mechanism or guaranty fund.

Troubling example

Perhaps the most troubling example of such activity, both interms of magnitude and method, has played out in New York. Astatute known as Section 332 authorizes assessments on domesticinsurance companies to defray “the expenses of the [insurance]department.” But the budget of the New York Insurance Dept. itselfhas not been limited to its own expenses for many years. Through anobscure and highly questionable practice known as “sub-allocation,”funds from the department's budget have been used for a variety ofprograms that are not administered by the department and which havelittle if anything to do with insurance.

Sub-allocation has gone on in New York for some time, but thesize of the amounts diverted through this process has grown toextreme levels as the state's budget situation has become moredire. The department's budget for 2007-2008 provided forapproximately $200 million in assessments and more than $74 millionin sub-allocations. The next year's budget provided for about $240million in assessments, supporting about $111 million insub-allocations. But that excessive amount was not the end for2008-2009, thanks to a deficit reduction plan adopted in February,which added $180 million in assessments.

The method by which Section 332 assessments have grown has beenproblematic, as has the magnitude of the assessments. The amountdetermined in a given budget cycle is arrived at arbitrarily, andassessments are made without sufficient notice. Such practicesconstitute an extreme burden on insurers as they try to managefinances during a fiscal year.

Although New York offers probably the worst example of raisingfees or assessments, it isn't the only state to do so. Last year inOhio, for example, the general assembly enacted legislation toincrease the fee paid by insurers for motor vehicle records from $2to $5.

Some states considered but ultimately did not enact legislativeprovisions to increase assessments on insurers. In North Carolina,House and Senate members considered but resisted adoptingprovisions in the state's budget bill that would have increased thepremium tax from 1.9 percent to 2.25 percent; removed the premiumtax offset for guaranty fund payments; increased the regulatory feefor insurers from 5.5 percent to 6 percent; and created a tax onrepair, maintenance and installation services that include autocollision repair and property restoration, increasing claims costsup to 4.75 percent.

Appropriation of funds

In addition to raising fees and assessments, a common way forlegislators to go after insurance money is to raid a fund that hasbeen stored for a specified purpose. In Arizona, a case is pendingat the state Supreme Court over the state's treatment of aninsurance guaranty fund.

In New Hampshire, the state legislature became aware that thestate's medical malpractice joint underwriting association (JUA)had built up a sizeable surplus and decided that, because the JUAwas created by the state, the state could simply appropriate fundsamounting to $110 million to balance the state's budget.

Not surprisingly, the association's policyholders challengedthis in court, and a Superior Court judge issued a ruling in Julythat the law transferring the funds was unconstitutional. NAMIC hasjoined with the New England Legal Foundation in filing an amicusbrief supporting the position of the JUA's policyholders whochallenged the validity of the law.

Short-sighted practices

While these budgeting measures might be attractive topolicymakers striving to close budget gaps, budgeting practicesthat place excessive and inequitable burdens on insurers areshort-sighted. Although the immediate impact may be increasedrevenue for state coffers, the long-term impact of such actionscannot be ignored.

Hiking fees and assessments increases costs for insurers thatare ultimately borne by businesses and individuals who purchaseinsurance. As such, it is not inaccurate to consider them a hiddentax assessed through the insurance mechanism. Meanwhile, raidingfunds, in addition to being an illegitimate and possiblyunconstitutional taking, means less security for the entities thatthe fund was meant to serve. Such actions also discourage theestablishment of other funds that may be good solutions to publicpolicy problems.

Such practices also fail to recognize that insurers already paysubstantial amounts directly through premiums taxes. According tothe Insurance Information Institute (III), insurance companies paid$15.7 billion in premium taxes in 2008, or $52 for every personliving in the U.S.

Excessive fees, assessments and other practices also fail torecognize the vital role insurers play in the economy. Mostsignificantly, they perform insurers' fundamental function ofproviding coverage that enables economic activity. In addition,they provide jobs amounting to approximately 2.3 million, IIIstates. Insurers also have significance as investors, and they payclaims that allow individuals and organizations to continuefunctioning as productive members of society.

Political and fiscal realities are what they are, and insurerrepresentatives expect to see more rather than fewer proposals inthe 2010 legislative sessions to get money from the insurancesystem. In difficult fiscal times, however, policymakers shouldfocus on ensuring the preservation of a healthy businessenvironment rather than taking actions that could harm an industrythat is a foundation of the economy.