Herb Denenberg Column For November 23, 1998


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 Pennsylvania is all too typical. Take a look at the last two appointments to the office of insurance commissioner. The commissioner came right out of the industry in both cases. And what about the commissioner that left. She (as is the custom) goes right back to the industry. So the office is a temporary sojourn between working for the insurance industry. It's the classic foxes guarding the chickens.


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 Pennsylvania, which appears in two volumes (or for that matter the insurance laws of other states).


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 Harrisburg, in Trenton, or for that matter, in any other capital city. So the insurance industry, with rare exceptions, gets pretty much what it wants.


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.)

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