Legislators in Utah have responded quickly to concerns expressed by technology leaders that the state’s insurance department has struck a dissonant chord. Now they have an opportunity to help Utah get back into regulatory tune.
Late last year, the Utah Department of Insurance issued a discordant finding against a new human resources platform named Zenefits. The new firm offers a free cloud-based system that allows firms to shop for insurance products. In the department’s judgment, Zenefits was in ongoing violation of the state’s anti-rebating statute. Things became stranger still when Zenefits was fined and instructed to comply with the department’s order or cease operations in Utah.
The department’s harsh tone was striking in light of the obscurity and unrelated purpose of the law it was charged with violating. Anti-rebating statutes seek to prevent firms that sell insurance from offering benefits in exchange for insurance products. For example, a broker is barred from offering a television as part of a deal for the sale of an insurance policy. The television would constitute an impermissible "inducement."
Anti-rebating laws exist to prevent insurance transactions from providing inducements so generous that insurer solvency might be threatened. For this reason, many years ago, they were promoted throughout the nation to ensure stability in state insurance markets. Today, almost all states have anti-rebating laws that are closely related in substance and form. That is no accident.
Insurance is an industry largely regulated by the states. Since insurance companies often operate in many states, it is essential for regulatory harmony and statutory predictability to exist between the states. Toward that end, national organizations such as the National Association of Insurance Commissioners and the National Conference of Insurance Legislators draft and circulate model legislation so the states can enjoy the benefits of local control without experiencing the pitfalls associated with regulatory asymmetry.
Thus, when the Utah Department of Insurance issued its finding against Zenefits, it pushed its anti-rebating statute out of conformity with others, including states that have examined this specific case such as Texas, Wisconsin and Washington. Utah mistook Zenefits' willingness to bundle a human-resources web portal with its other products as an inducement, which it is not.
To be an inducement, like the television, it is necessary for a product to be linked with the purchase of insurance. The human resources software that Zenefits bundles is free and available to anybody, independent of the insurance transaction. In other words, it is offered to the public on the same terms (free) with the insurance product as it is without the purchase of insurance. Is that an incentive? Sure! Is it an inducement? No.
If Utah maintains the Department of Insurance’s position, it will be impossible for firms to bundle services with insurance products. Industries will be forced into siloes and consumers will not realize the benefits of novel business models.
Confronted with the prospect of upsetting a competitive and attractive regulatory climate, prominent legislators have filed bills to update and clarify the anti-rebating statute so that Utah’s interpretation is no longer a national aberration. It is this sort of legislative responsiveness, in consort with Utah’s otherwise excellent regulatory restraint that led the state to its sixth-place ranking in R Street’s latest Insurance Regulatory Report Card.
If these legislators are successful, Utah will be on course to live up to its reputation as a Mountain West Silicon Valley, and to regain its form as a regulatory leader-among-equals.
Ian Adams is Western Region Director of the R Street Institute, a free-market think tank based in Washington, D.C.