Citizens for Homeowners Insurance Reform

Professor Gives 'F' Grade to State Regulators' Consumer Protection

September 15, 2011 | By Arthur D. Postal,
NU Online News Service, Sept. 15, 2:32 p.m. EST

WASHINGTON-The core of state regulation-market conduct and consumer protection-was debated at a recent Senate hearing.

A congressional staffer says it is unlikely many insurers will be subject to federal oversight through the new Dodd-Frank Act.

But, the official said it is unclear whether there will also be heightened and stronger state regulation as mandated by the Dodd-Frank Act. Daniel Schwarcz, a University of Minnesota law professor, says state insurance regulation "has generally failed at a core task of consumer protection regulation-making complex markets comprehensible to consumers and broadly transparent to those who may act on their behalf."

This type of transparency is fundamental to "fostering competitive and efficient markets," he adds.

The comments were made at a hearing held by the Senate Subcommittee on Securities, Insurance and Investment of the Senate Banking panel. The hearing was on "Emerging Issues in Insurance Regulation."

Baird Webel, a specialist in financial economics at the Congressional Research Service, says the overall expectation is that few insurers will be deemed systemically important by the Financial Stability Oversight Council (FSOC).

This Senate subcommittee panel was created by the Dodd-Frank in order to ensure that the failure of complex financial institutions does not affect world financial stability.

Webel says it is unclear whether heightened oversight by state officials imposed under the law will ever take place, primarily because of problems at the non-insurance subsidiaries at American International Group.

Webel says the act mandates that states impose additional oversight of insurers because of the financial crisis, but this process may take longer because National Association of Insurance Commissioners (NAIC) model laws must first be adopted by the individual state legislatures in order to take effect.

"This process can take substantial amounts of time and, in addition, state legislatures are not required to pass the NAIC models, as suggested by the NAIC," Webel says. "This may alter the effectiveness of the models or introduce variation in regulation among different states."

Within his testimony, Schwarcz says states do a poor job of promoting transparency in consumer-oriented property/casualty and life insurance markets.

He says, "this failing occurs at two levels." First, most states do not empower consumers to make informed decisions among competing carriers, and second, there is a lack of publicly available market information about carriers, Schwarcz adds.

For example, in personal lines markets-home, auto, and renters insurance-consumers have no capacity to identify or evaluate the substantial differences in carriers' insurance policies.

"Consumers cannot acquire policies before, or even during, purchase," he says. "Instead, they receive them only weeks after the fact." Meanwhile, he says, "no disclosures warn consumers to consider differences in coverage, much less enable them to evaluate these differences."

"Similar deficiencies prevent consumers from comparing carriers' claims-paying practices," and consumers neither receive nor can access reliable measures of how often or how quickly carriers pay claims, he continues.

Furthermore, consumers are not told about agents' financial incentives to steer them to particular carrier, Schwarcz adds. "Given this collective lack of transparency, it is hardly surprising that several large national companies have started to hollow out their coverage and embrace aggressive claims handling strategies," he says.

On market issues, Schwarcz says carriers' terms of coverage are not generally publicly accessible and company-specific market conduct information-including data on how often claims are paid within specified time periods; how often claims are denied; how often policies are non-renewed after a claim is filed; and how often policyholders sue for coverage-is also hidden from public scrutiny and treated as confidential.

"Virtually no states make available geo-coded, insurer-specific application, premium, exposure, and claims data, similar to that required of lenders by the Home Mortgage Disclosure Act," Schwarcz says.


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