Herb Denenberg Column for September 20, 1999


Who is supposed to protect the insurance consumer in the marketplace? Whoever it is, they're not doing it. Here's why.


THE INSURANCE COMMISSIONER. The insurance commissioner is supposed to protect the consumer against abusive and improper practices of the insurance industry. But for much of the history of insurance regulation, the insurance commissioner all too often is a mere puppet of the insurance industry.


Even the Wall Street Journal, always a friend and usually an apologist for business interests, admitted in a front page article that insurance companies "typically could count on kid-glove treatment" by insurance commissioners.


There are many reasons for that. Among the most important are the army of insurance commissioners that come right out of the insurance industry and go right back into it when they're done. Who are they going to be protecting -- their past and future employers (the insurance companies) or the public? You can guess and you'll be right.


The last two Pennsylvania insurance commissioners are perfect examples of that pernicious trend. They both came out of the industry. Linda Kaiser, who preceded the current incumbent, came out of the Reliance Insurance Company and then resigned in 1997 to return to her old employer. She had also worked for Cigna Insurance Company for seven years until 1992. But that did not stop her from a controversial ruling in Cigna's favor in a case involving the restructuring of the company. After Kaiser ruled in Cigna's favor, a Commonwealth Court ruled that Kaiser should not have ruled on the case and that she did not give the policyholders a formal hearing for lodging objections. That's typical of the cozy relationship between the insurance industry and the office of the insurance commissioner.


As soon as Commissioner Kaiser resigned, I predicted correctly that the next insurance commissioner would come out of the industry. I was right. And in keeping with the conflict-of-interest tradition, the next commissioner was called upon to rule on a landmark case involving her former employer, Provident Mutual. By that time even the conflict-of-interest happy office of insurance commissioner had the message. The commissioner excused herself from ruling on the Provident case, but appointed her deputy to do so. You can be sure that her deputy would not come up a ruling to antagonize the boss, the commissioner. The deputy ruled in favor of the Provident. And on September 17, a Common Pleas Court Judge, Stephen E. Levin, ruled that Provident failed to give its policyholders the facts on a corporate restructuring and therefore voided the restructuring. If the Insurance Commissioner and her designee were doing their job, they would have forced the Provident to fairly disclose the facts to their policyholders and the litigation would not have been necessary. That in a nutshell is the state of insurance regulation in Pennsylvania and beyond. It's so bad that one member of the Pennsylvania House, Rep. Kathy Manderino (D.,Phila), in a published report, said the Pennsylvania Insurance Department (headed by the insurance commissioner) has a persistent bias in favor of the industry, and added: "The Insurance Department is supposed to protect the interest of consumers. But when they testify in hearings, it sounds as though the Insurance Federation of Pennsylvania (the chief lobbying organization of the industry) wrote their speeches."


And even the Wall Street Journal, despite its pro-business bias, commented on that regulatory revolving door (from the industry to commissioner and back to the industry afterwards). It noted (in the same article which admitted kid-glove treatment for insurers): "Nine of the past 11 National Association of Insurance Commissioners (NAIC) presidents took industry jobs after they left the association." The NAIC is not only an organization of commissioners but it also has important regulatory responsibilities. So it is not comforting to consumers to know the top people at the NAIC are usually involved in the old revolving door of regulation.


You can't rely on the insurance commissioner to protect the public. That's certainly true in Pennsylvania now and it's also true in most other states. So can you rely on the legislature? One way to answer that question is to look at people on the insurance committee in the Pennsylvania Senate and House. One member owns a title insurance company Another is a shareholder of an insurance agency. Another legislative leader is a member of a law firm that represents eight insurance companies. Still another member owns an insurance agency. And then look at the contributions of the chairmen of these committees. Both the chairman of the House and Senate Insurance committees received about half their PAC contributions from insurance companies.


Here's another way to understand the role of the legislature in protecting the insurance companies instead of the public. Look at the history of the 1995 law that permitted mutual insurance companies to convert to stock companies, and in the process take away the ownership rights of their policyholders without compensation. This is legalized robbery pure and simple. Needless to say it was written by the chief insurance lobbyists. Needless to say the legislature passed the rip-off legislation without hearings, without debate, and with virtually no dissent. It passed by a unanimous vote in the Senate and by a lopsided majority in the House.


So one of the most radical pieces of insurance legislation that authorized the ripping off of millions of policyholders to the tune of billions of dollars was rubber-stamped by the Pennsylvania legislature.


So the two institutions that should be the center of gravity of protection for the policyholder -- the Pennsylvania Insurance Commissioner and the Pennsylvania Senate and House -- can correctly be viewed just as an adjunct of the insurance industry.


THE MEDIA. If the media would do its job, it would be more difficult for the commissioners and legislators of the land to sell out to the insurance industry. But the media sleeps on insurance issues. For proof of that, check out the coverage of the demutualization trend, and you can see that even in the face of multi-billion dollar rip-offs the media is tame and quiet. Somehow, policyholders are going to have to figure out a way to protect themselves. And no one has been able to come up with the formula for doing that.

(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.).

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