THE MYTH AND REALITY OF INSURANCE AND CONSUMER PROTECTION
WHY THE LAST THING COMMISSIONERS THINK OF IS THE POLICYHOLDER.
A PROGRAM OF REGULATORY AND CONSUMER PROTECTION REFORM.
Herb Denenberg Columns for week of March 7, 2000
Myth: Pennsylvania and many other states have insurance commissioners who make sure policyholders and claimants are treated fairly.
Reality. Insurance commissioners in most cases over the years are little more than a lobbyist for the insurance industry. They often come out of the industry, spend a few years in the state capital polishing up their resume, and then go back to work for the industry. While serving as insurance commissioner, they usually serve their past and future employers and benefactors, not the public or the policyholder. Commissioners are appointed by the governor (in Pennsylvania and most states), but insurance executives behind the scenes are making the recommendations and most heavily influencing the governor's appointments.
Myth: The insurance commissioner regulates the insurance industry, to make sure both the public and policyholders are treated fairly.
Reality: The insurance industry regulates the insurance commissioner, to be sure the industry's interests are protected. Translated that means we have regulation of, by, and for the industry.
Myth: Legislators write and enact the insurance laws.
Reality: Insurance lobbyists or companies write most legislative bills relating to insurance. Then the proposals are made under the name of a legislator and go through the legislative process toward enactment, often without any public scrutiny.
Myth: Legislators exercise independent judgment in voting on insurance bills and other matters and are part of a democratic decision process.
Reality: Committee chairman (often heavily bankrolled by insurance industry political contributions) make the major decisions and then with a policy set by party leadership, most go along for the ride.
Myth: The legislators pass judgment on insurance matters freed of any substantial conflict of interest.
Reality: Published reports amply document that the legislature is sinking in conflict of interest. Last year, published reports indicated that about half of the political contributions of the chairman of the house and senate insurance committees in Pennsylvania came from the industry. What's more, many members of the legislature were actively involved in the insurance industry, as agents, owners of companies, and lawyers representing insurers.
Myth: The insurance commissioner is free of conflicts of interest.
Reality: In addition to coming out of the industry and going back into it when their service ends, commissioners apparently haven't encountered a conflict of interest they didn't approve of. The last two Pennsylvania Commissioners are both perfect examples of what to expect. Both presided over departments that made decisions on regulatory matters involving their former companies and employers. Even Ken Starr would see that as a conflict of interest.
Myth: All of the above is a new and shocking revelation somehow only recently discovered.
Reality: This is now a new but a very old problem. In the past, Congress and serious students of insurance regulation have concluded the system supposedly to protect the public is a non-system and a joke on the public interest. The insurance director of the Consumer Federation of America said things could get worse in Pennsylvania if you tried.
I recently had occasion to testify before a group of legislators, and then chatted with Bob Hunter, a former Texas insurance commissioner and now director of insurance for the Consumer Federation of America, Dr. Joseph Belth, editor of the Insurance Forum and long-time critic of the insurance industry, and Ken Jacobson, the lawyer who represented policyholders and overturned the Provident Mutual demutualization. All of us agreed on the sad state of insurance regulation, and the fact that it is getting worse, not better.
So I thought this is a good time to come up with some proposals to improve regulation.
Perhaps the place to start is campaign finance reform. As long as political contributions control political decisions, the insurance commissioner is not likely to pay much attention to consumers, nor are legislators and governors, when they look to the industry for campaign contributions.
After many years of study, almost everyone sees the present state of campaign financing as corrupt and unsound. When you cut to the core, it is a form of legalized bribery, and a very effective form at that. So we need changes at the state and federal level. Perhaps there is no perfect alternative to the present election financing system, but a reform proposal could hardly make things worse.
In my next column, I'll have some more suggestions for changes that could bring about some semblance of consumer protection for the beleaguered and battered policyholder and insurance public.
(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)
(Last of a series on insurance and consumer protection). When it comes to proposals to change the office of insurance commissioner in Pennsylvania (and for that matter in many other states), a former Texas insurance commissioner, Bob Hunter, had this reassurance: "No matter what you do in Pennsylvania, you can't make it much worse." With that happy thought, here are some ideas for improving consumer protection and insurance regulation in Pennsylvania. Most of these proposals if not already implemented elsewhere, would make sense in other states as well.
(1). ELECTION RATHER THAN APPOINTMENT OF INSURANCE COMMISSIONER.
Now, the governor appoints the commissioner with the advice and consent of the Senate. In some states such as Florida, California, and Delaware, the commissioner is elected. That approach makes sense. First, it forces insurance issues into the public dialog. Now, insurance is rarely discussed in political campaigns unless there is some overriding issue of public importance (as, for example, the auto problem in New Jersey's last gubernatorial election). With a commissioner running for public office, issues now neglected would get some public airing.
Second, an elected commissioner would be more responsible and accountable and communicative with the public. Now, no one knows who the commissioners are. They hide quietly in Harrisburg conducting their work for the insurance companies. The election process would not produce paragons of virtue, but at least it would force commissioners out of hiding in Harrisburg.
Third, when there is undue political influence through campaign contributions, it will be more obvious to the public. Now the political pressure comes through the governor's office and it is not as apparent as it should be. At least when the political fix is in with an elected commissioner, the profile of the fix will be more easily discovered and publicized.
(2). ESTABLISH AN OFFICE OF CONSUMER ADVOCATE.
This would be an independent office with authority to appear before the office of the insurance commissioner to represent the public interest. Now insurance lobbyists swarm through the capitol like cockroaches; the public interest is rarely represented and even more rarely effectively advocated. There is precedent for this office in the Pennsylvania utility consumer advocate, and in other states as well. This has been proposed in Pennsylvania by Rep. Ivan Itkin but has not yet made headway through the legislature. It is not a panacea, but it would lend some trace of countervailing power to a system now controlled entirely by the insurance industry.
(3). LAWS RELATING TO OFFICE OF COMMISSIONER.
Critics have long deplored what has been called "revolving door regulation." That means the regulator (in this case the commissioner) comes right of the insurance industry and then returns to it at the conclusion of her term. There should be some limitation on the ability of the commissioner to return to the industry. For example, there could be a one or two-year period during which the commissioner, after leaving office, could not go back to employment within the industry or other activity on its behalf.
At the very least, there should be a prohibition of commissioners negotiating their return to the industry while they are still serving and supposedly protecting the public. That is perhaps the most unseemly aspect of revolving door regulation.
An even stronger provision would prohibit service to the industry for a few years before and after appointment.
(4). NOMINATION PROCESS.
If the present appoint system continues, the public and the legislature should get involved in the nomination process of commissioners and other cabinet officials from the beginning. If there was some sunlight on the process, it would be more difficult to rubber-stamp a parade of insurance industry executives as commissioners. There should be some pressure to inject some semblance of balance into the selection and nomination process.
You can be sure the industry lobbies heavily behind the scenes before a commissioner is appointed. Public interest groups should do the same.
(5). LEGISLATIVE CONFLICT OF INTEREST RULES.
The legislature ought to take a few small steps toward cleaning up its act. They should prohibit those with an interest in the insurance industry (such as owning an insurance company, owning an insurance agency, representing insurance interests in their capacity as practicing lawyers) from voting on insurance matters. The legislature should also prohibit insurance committee chairmen and members from getting contributions from the industry.
(6). OVERSIGHT HEARINGS.
At the federal level, Congress frequently holds oversight hearings on various agencies to make sure they are doing their job. The state legislature should make a frequent practice of oversight hearings on the Insurance Commissioner and her Department of Insurance.
(7). INVOLVING CONSUMERS AND THEIR REPRESENTATIVES.
The legislature should establish a better relationship with consumer groups that have expertise in the insurance area, and could bring some countervailing power to the overwhelming influences of the insurance industry. Among the consumer groups are the Consumer Federation of America (and its insurance director, Bob Hunter); Consumers Union (publisher of Consumer Reports); the "Insurance Forum," an insurance newsletter published by Dr. Joseph Belth; the National Consumers League; the Pennsylvania Public Interest Research Group (PIRG), and its national affiliate, the U.S. Public Interest Research Group; and Ralph Nader's Public Citizen and its Congress Watch.
(8). POLICYHOLDER COMMITTEES.
Whenever a company proposes a corporate transformation of a mutual company (such as a merger or demutualization), there should be a mechanism for creating a policyholder committee to investigate and advocate the policyholder interest, which is frequently in conflict with the company interest as propounded by their executives. (Ideally, there should also be an independent office of consumer advocate, to appoint such a committee and assist in its activities).
(9). CAMPAIGN FINANCE REFORM.
This is behind the whole problem. Money controls politics, and now the insurance industry has the money and the policyholders don't, at least when it comes to political contribution. Until the legalized bribery, called campaign contributions, is eliminated, it will be difficult to implement any of the above proposals or introduce some semblance of fairness and balance into the regulatory process.
(10). UTILIZATION OF THE INTERNET FOR POLICYHOLDER AND PUBLIC COMMUNICATION.
The Internet is the most powerful and empowering instrument of communication in world history, according to technology authorities including Dr. Rocco Paolucci, who heads the Sapio Institute. He says this provides a low-cost means of mass communication to policyholders and public. The Internet should be utilized by companies, regulatory agencies and policyholder groups to communicate among policyholders. To give one example, one or more policyholders can use Yahoo! (the search engine) to set up an association or club to communicate among all interested parties. There is no cost for setting up one of these Yahoo! Other Internet portals and search engines provide similar services.
(11) MOVE STATE CAPITOL TO PHILADELPHIA OR PITTSBURGH.
Any state would be better off to get its state capitol into one of its largest cities. In Pennsylvania, the legislature and governor escape adequate scrutiny because there in Harrisburg, where the media coverage tends to be spotty. In a major city, the workings of state government, including the insurance department, would get more coverage.
(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)