State-Based Insurance Regulation Creates 'Stealth Bailouts', Critics Argue

“But then what happens afterwards depends on the state exactly. But in the vast majority of states, you can, as the insurer, get a tax credit against that assessment liability. And in about thirty four states you get a full tax credit that you can take twenty percent a year over five years, and then in another ten states it's roughly ten years. It's only about six states where you don't get any tax credit. So of course, if you have a fully offsetting tax credit, this is economically equivalent to a taxpayer bailout of the insurance policy holders. But nobody ever votes on this. There just happens automatically by operation of law, and the insurer is stuck with losing what we might call it kind of just like time value of money because they have to float this in the meantime. But it is a stealth taxpayer bailout.”

“The way that a guarantee fund pays for this protection in the first instance is by levying an assessment on every surviving insurer in that state. But this assessment is only levied after the insolvency has already happened. So if I'm the insurer that went down, I've actually contributed zero dollars.”

“The design of the guarantee funds actually amplifies this problem because then banking, the assessment premiums that banks pay are risk weighted, they're not purely sized way to Obviously size is a major important component of risk, but for guarantee funds it's purely the premium volume. So you can imagine two identical ensures with the same premium volume, except that one of them, you know, invests very conservatively, the other one invests, you know, like a madman. You know, the expected value of the public backstop is much greater, you know, for one than the other. And so you have this kind of implicit subsidy that is being routed through this like underlying backstop.”