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Economic development tops insurance initiatives: Raising money, lowering taxes top legislative agenda

February 26, 2007

The Indiana Department of Insurance wants to raise almost $2 million by hiking some fees it charges insurers, while still cutting their premium taxes in an effort to attract more companies to the state.

The proposals are among several bills lawmakers are mulling that affect the insurance industry this legislative session.

House Bill 1570, which would bolster Insurance Department coffers in part to hire more staff, has cleared early hurdles. It sped through both the House insurance and ways and means committees without any objection, and now heads to the full House for passage.

The additional revenue is critical to Insurance Commissioner Jim Atterholt's expressed desire to improve in-house operations. Based on premium volume, the department's $5.8 million operating budget ranks among the lowest in the nation, according to the Kansas City, Mo.-based National Association of Insurance Commissioners.

"It's a pretty dramatic bill," Atterholt said. "The way it is devised is that it will help guarantee that any fee increases will actually go to the department."

That's a promise needed to gain support from insurers leery that the fee increases will get swallowed by the state's general fund. The insurance industry already pays Indiana more than $180 million a year in premium taxes, and only a few million dollars winds up in the Insurance Department.

The $2 million would be raised three ways. Foremost, the department would raise the annual internal audit fee it charges insurers from $350 to $1,000.

Second, a $35 fee would be imposed on each form filed by insurers who change products or bring new ones to market. Insurers sometimes submit several forms and pay only one $35 fee. The new charge would be capped at $1,000 per filing.

Third, the department would require agents to renew their licenses every two years instead of every four. The state charges $40 for Indiana residents and $90 for non-residents, and would double the amount raised by cutting the time in half. Indiana is just one of two states that requires agents to renew their licenses every four years.

The extra funds would allow the department to hire three more consumer analysts to help it respond quicker to inquiries, two policy analysts to help get products to market faster, and an actuary, which the department lacks.

Premium tax

House Bill 1250, known as the premium-tax-reduction bill, reduces the tax rate insurers pay on their premium amounts from 1.3 percent to 1 percent. The reduction would occur during a three-year period, with the tax declining a 10th of a percent every year.

Supporters laud the proposal as a means to compete more for the insurance business that other states with lower tax rates are attracting. Iowa and Nebraska, for instance, have a 1-percent tax.

Insurance executives in Illinois and Michigan are watching the developments in Indiana closely, said Mike Chrysler, the state's director of insurance initiatives. Both states are considering tax increases to lessen budget shortfalls.

"At least two companies I'm in communication with said their states are turning south," he said. "If we can get a reduction, they would be hard-pressed not to [relocate] to Indiana."

Cutting the premium tax to 1 percent also is critical because it would have a subsequent effect on what's known as the retaliatory tax. In the insurance industry, the retaliatory tax is what companies pay to other states based on their home state rates. If an Indiana-based insurer is doing business in Iowa, it pays that state 1.3 percent of its premium amount instead of the lower 1 percent.

Insurance companies no doubt favor the lower rate, said Dan Seitz, a partner at Bose McKinney & Evans LLP who represents the Indiana Association of Health Plans, among other insurancerelated organizations.

"That clearly is in our gun sights as well," he said of HB 1250. "It would put Indiana among the two or three lowest [rates] in the country, and it would be an additional factor for companies to consider when they expand or relocate."

Many states have a premium tax rate of 2 percent, and Indiana was no different, until the Legislature lowered it to 1.3 percent in 1999. The insurance industry lobbied for a 1-percent rate then, but Indiana's poor fiscal situation prevented it, Chrysler said.

A lower rate will affect the amount Indiana collects in premium taxes, but only to an extent. Studies show that premiums grow on average 3 percent annually. Under a lower rate, Indiana will collect 2 percent less in taxes, but will gain 1 percent because of the growth in premiums.

More important, however, a lower tax could spur economic development, Atterholt said.

"When I travel to talk to CEOs, the first thing they ask is, 'What's your premium tax in Indiana?'" he said. "If I can tell them we have one of the lowest in the nation, it will have a huge impact on economic development in the state."

The legislation has been passed by the House Insurance Committee and has been referred to the Ways and Means Committee.

More deregulation

At the 11th hour during last year's session, lawmakers agreed to allow property and casualty insurers to bypass the Department of Insurance when changing rates and avoid what sometimes can be a lengthy wait for approval.

The proposal had the support of the Indiana Economic Development Corp., but met opposition from independent insurance agents concerned about ambiguities in the plans they may be purchasing.

This year, HB 1158 has been introduced to expand upon the previous legislation and allow companies to introduce coverage without first getting department approval. The only restriction is that insurers must have an A.M. Best rating of at least a B to ensure financial stability.

The bill has passed the House Insurance Committee.

Other bills

The Insurance Institute of Indiana, which represents the interests of property and casualty insurers, is keeping a close eye on HB 1481. The bill reverses tortreform legislation passed in 1995. It requires 75 percent of punitive damages awarded in a settlement or verdict be paid to a victim's compensation fund and just 25 percent to the plaintiff, in an attempt to stifle frivolous lawsuits. Further, attorney's fees cannot be paid from the larger amount dedicated to the compensation fund.

HB 1481 reverses the percentages-75 percent to the plaintiff and 25 percent to the compensation fund-allowing lawyers to be paid from the larger amount. The Insurance Institute opposes the bill, arguing it will raise premiums. Other insurance bills worth noting include: SB 171 extends safeguards already in place for people over age 65 to consumers of all ages when purchasing annuities. HB 1248 prohibits a life insurance company from selling a policy financed with the intent to be sold to investors. HB 1336 specifies requirements concerning health benefit payments. HB 1390, which would have affected pharmacy benefit violation penalties, died in committee.
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