INSURANCE REGULATION: OF, BY AND FOR THE INSURANCE INDUSTRY
Herb Denenberg Column For
Who regulates the insurance industry? You probably think
government is watching over the industry to protect you. You probably think the
insurance commissioner of your state is there to make sure that insurance
companies treat you fairly and to make sure the companies are financially
sound.
After studying insurance regulation for many decades, I've decided
the public and insurance scholars have it all wrong. The insurance commissioner
doesn't regulate the insurance industry. It's usually the other way around --
the insurance industry regulates the insurance commissioner.
You may know the way the system works, and
In fact the previous commissioner actually ruled on matters
involving her former company. But as we've seen, what a reasonable man would
view as an obvious conflicts of interest doesn't apply
in matters of law or insurance regulation.
Then there are the laws that supposedly control the office of
insurance commissioner, the insurance law of
Those laws come from the legislature, but in most cases you can
trace their source back to the insurance industry and its lobbyists.
These laws, on their face, are often designed to protect the
insurance industry instead of the policyholder. Take for example the law
against rebates. It is illegal to let the policyholder share in an insurance
commission. If rebates were legal, agents could compete by cutting commissions.
On life insurance these commissioners are 55 percent or more of the premium.
Sometimes the commission is 100 per cent of the premium. But if an agent
decided that he wanted to compete by rebating part of the commission to the
policyholder he would be in violation of the law.
When I was insurance commissioner, I found laws and regulations
that prevented companies from cutting their premiums, even when they wanted to.
To me, it looked like those laws were designed to prevent competition, hurt the
policyholder, and protect some companies from competition. In one case, I ruled
that such law was so arbitrary and unreasonable that it was unconstitutional
and should not be enforced.
Over the years, there have been many laws prohibiting or severely
restricting group auto and homeowners insurance, and other forms of marketing
of insurance. These restrictive laws are designed to protect some segments of
the industry from competition of other segments, and should be taken off the
books.
This gross distortion and misuse of insurance law and regulation
can exist, because regulation is the property of the insurance industry, not
the public interest. Unfortunately, there is no strong consumer lobby in
To summarize, insurance regulation is "of, by and for"
the insurance industry. But that's the way the regulatory, legislative and
political system works. Money runs politics, and, consequently money runs the
system.
Here's some more evidence of who insurance commissioners work for.
The public rarely knows their names or where they hang out or what they are
doing. I was once on a radio talk show, blasting the insurance commissioner for
being invisible as far as the public goes. This commissioner heard my volleys
and called in to try and refute them. Unfortunately, neither the producer of the
show nor the talk show host even knew her name. I had to tell them who was
calling, and when she came on to make her point her anonymity to the public
proved my point.
The insurance industry prefers that the insurance commissioner
stay quietly in the background, while their lobbyists get their way on
regulatory matters. The insurance industry knows the commissioner and where to
find her. But the public doesn't.
In fact, an industry research group called the IRC, Insurance
Research Council, conducted a survey to test the consumer's knowledge of
insurance regulation. The survey found that 14 percent thought the insurance
industry is generally not regulated. (That answer was considered wrong, but as
I have suggested, it may be the close to the truth). Ten percent said the
federal government is the primary regulator, which is wrong. Twenty-one percent
had no clue whatsoever. And only 55 percent even knew that the state government
regulates insurance.
I've always been amazed at how few people even know the insurance
commissioner not only exists but is also there to handle complaints on claims
and other matters and to protect the public. Commissioners are supposed to do
that, but they are remarkably quiet and timid in their approach to getting
action on consumer complaints.
Protecting the consumer from unfair treatment in the claims
process is one of the most important and neglected functions of the insurance
commissioner. Claims adjusters can take advantage of policyholders who are
usually unfamiliar with their policies and with the law that governs their
interpretation.
Some critics of the industry (and I am among them) says the
industry takes advantage of their policyholders on a wholesale basis by denying
claims. Insurance companies know the typical policyholder is not well informed
on insurance matters, and will even give up in the face of a turn down.
Litigating a small claim, even in small claims court, is often more time and
trouble than its worth. So companies often engage in what is called
nullification of the contract -- turning down claims even if meritorious and
hoping the policyholder will give up in disgust or confusion.
The indictment of insurance regulation of insurance commissioners
is not new. Decades ago these complaints were lodged in Congressional hearings,
but nothing was done to remedy the problem then. And it is not likely that
anything will be done to remedy them now.
Until the public figures out a way to mobilize the money and political
muscle of the insurance industry, it will keep coming in second to that
industry. And in such contests, the second place finisher ends up as a loser in
every way.
(Herb Denenberg is a former Pennsylvania Insurance Commissioner
and consumer advocate.)
Click here to return to our homepage