WHY YOU PAY TOO MUCH FOR INSURANCE, GET THE WRONG COVERAGE AND OFTEN CAN'T COLLECT ON YOUR CLAIMS:

Herb Denenberg Column for week of February 26, 2001.

THE STORY OF INSURANCE REGULATION: REGULATION OF, BY AND FOR THE INSURANCE COMPANIES.

Don't think the insurance commissioner regulates the insurance industry. It's the other way around. The typical insurance commissioner over the years has been somewhere between a lapdog and puppet of the industry. That means consumers often pay too much for insurance, get the wrong kind of protection, don't get their claims paid property, and are otherwise ripped off by an industry that pretty much operates without the restraints that a commissioner is supposed to apply.

We need policemen on our streets. Everyone admits that. But do we need a regulator, a policeman, a referee or something of that sort to watch the insurance industry? Politicians and the insurance industry say "no." So they see to it that the insurance commissioner is appointed with their approval and is little more than their errand boy. The commissioner supplies the appearance of consumer protection, but pretty much delivers insurance industry protection.

This problem has been obvious to students of insurance regulation for many decades. It has been the study of Congressional hearings and endless studies. But nothing has been done about it.

Perhaps this sorry situation is now more obvious with the public and political acceptance of the impact of campaign finance laws, always strong, but now overpowering beyond the wildest imagination. Money dictates policy. Campaign contributions gain access and input into the decision making process and also legislative and executive outcomes. The consumer is left out in the cold. What else is new? What's not new is a high-level effort to change things. The only thing that changes is that it gets worse. The ruling philosophy is less regulation, less government interference, and more getting government off the back of business. Translated that means the insurance industry (and other industries) do pretty much what they want to do.

This legalized rip-off of the public has come to be accepted by politicians and the industry itself. But nowhere is it more obvious than in the insurance industry. Here's the latest proof of that. The front page of one of the leading insurance trade journals on February 21, 2001, carried this blurb: "National Underwriter Executive Editor-At-Large, Thomas J. Slattery, caught up with former National Association of Insurance Commissioners president George Nichols to talk about the implications of his recent trip trough the revolving door back into the industry he so recently regulated." Exactly what "revolving door" is the editor referring to? It's the door of an insurance commissioner's office, and it's called "revolving" because the commissioner typically comes in from a job in the insurance industry, and when he finishes a few years of service, he goes through the revolving door back into the service of the industry. In this case, the subject was George Nichols, who had served as insurance commissioner of Kentucky and as president of the National Association of Insurance Commissioners. But what happens in Kentucky is a long-standing national tradition in Pennsylvania, New Jersey, and across the country.

That "revolving door" means the crucial regulatory decisions are usually made by someone who starts out working for an insurance company, then gets appointed insurance commissioner, sticks around long enough to polish his resume and make better contacts in the insurance industry, and then negotiates a top job with the industry, resigns, and goes back to work for the industry. You can see from that scenario that the last thing on the typical insurance commissioner's mind is protecting the policyholder or public. The first thing on his mind is protecting his past and future benefactors - the insurance industry in general and his past and future employers in particular. Aggravating the situation are their short stays, usually only a couple of years. Their terms as insurance commissioners are just a brief recess in their service to and dedication to their insurance industry masters.

What is interesting in the article in the National Underwriter is that this revolving-door system is so ingrained in our regulatory history, that its just accepted as routine, with no questions asked. In fact, as Mr. Slattery promises,

his article is supposed to "examine the implications" of the trip through the revolving door. But he ignores the most important implication - that a revolving door system is a built-in conflict of interest: a built-in bias against protecting policyholders and a built-in regulatory abuse.

Mr. Slattery and every politicians and industry executive can describe what happens. Here's the way Mr. Slattery put it after the latest insurance commissioner, George Nichols of Kentucky resigned and went to work as a top executive at the New York Life Insurance Company: "Cynics would have it that this is an unremarkable event, that he is, after all, just the latest in a long, long list of regulators to go the way of all flesh and slip easily, and lucratively, into the ranks of the recently regulated." Note that Mr. Slattery says this without blushing, and he says this as though it's just another routine day in the life of the insurance industry.

The only question of conflict of interests that is even mentioned is smoothed over by Mr. Slattery and Mr. Nichols in describing how the Commissioner negotiated his new job with the industry while still serving as Insurance Commissioner. Mr. Slattery writes: "So last July, he (Nichols, the insurance commissioner) sought guidance from the state ethics commission, which said he was free while in office to discuss positions in the private sector so long as he excused himself from decisions on matters related to any organization with which he might interview."

That solution to the conflict of interest problem is absurd on several counts. First, a commissioner "might" interview with any and every company, so he ought to excuse himself as insurance commissioner. Second, even if the insurance commissioner excuses himself from matters related to his future employers, those questions will then be resolved by his key deputies. They, of course, were probably appointed by the commissioner and may not want to rule against their boss's future employer. Third, commissioners typically recommend one of their deputies for possible appointment as the successor commissioner. For that reason, any deputy would be unlikely to want to antagonize the commissioner. Fourth, a deputy is likely to know how a commissioner is thinking on any given matter, and is likely to follow his lead and succumb to his influence. Fifth, it is almost impossible to wall off issues that affect the one company and the vast number of other matters the commissioner constantly resolves. If he is really conscientious in excusing himself from all issues that might affect one company, he is practically out of the business of regulating. What's more if an outgoing commissioner is negotiating with a number of different companies, the conflicts of interests would affect almost every regulatory decision. Finally, even if the commissioner can wall off all issues relating to companies he is negotiating with, there is still the smell and appearance of conflict of interest.

Toward the end of the article, the revolving door theme revolves once more: ""Which brought us back, full circle, to that revolving door. Would he ever step into it again? (In other words would the departing commissioner ever take a commissioner's job again or some similar slot?) 'It would have to be the right situation,' he (Nichols) said." So the revolving door keeps revolving.

The revolving door is a tradition in Pennsylvania as well, continued by Governor Tom Ridge. He first appointed Linda Kaiser as insurance commissioner. Before her appointment she was a lawyer for the Reliance Insurance Company of Philadelphia. When she left the office of insurance commissioner, she went to work again for the Reliance Insurance Company.

Kaiser was a poster child for regulation of, by, and for the industry. One of her former employees was Cigna Corporation, a major insurance company. She served as Cigna's senior counsel for seven years. While insurance commissioner, she ruled in Cigna's favor on a major matter that came before the commission.

Kaiser was typical of the revolving-door commissioners in another way. She stayed on as commissioner for less then two years, and left after negotiating a high paying job in the insurance industry. When she left her office in 1997, I wrote: "You can be sure Governor Tom Ridge won't even blush if and when he appoints another representative of the insurance industry to the office of state insurance commissioner. You can be sure the main say in who becomes insurance commissioner will be the lobbyists, executives and spokesmen of the insurance industry."

Guess who was appointed as the next insurance commissioner: M. Diane Koken who came out of the Provident Mutual Life Insurance Company where she had worked for 22 years - from the time she graduated from law school. In 1998, Provident Mutual tried to convert to a stock company and Koken had to decide whether to rule on this plan. She excused herself, but, as suggested above, that does not solve the conflict of interest problem. The final decision on Provident Mutual was rendered by her deputy, Gregory S. Martino. He approved the plan, which was later rejected by a Pennsylvania court decision.

You can be sure there's a good chance that Commissioner Koken will return to the insurance industry when she leaves office, and her replacement is likely to be another insurance industry veteran.

But to get back the article in the National Underwriter, it shows that the industry and its trade press see revolving-door, pro-industry regulation as just part of the system, and without any real problems from their point of view. Unfortunately, there are serious problems from the public's point of view. But the beginning of wisdom is recognizing reality - that the deck is stacked against the consumer, and abuses are inevitable because no one is policing the insurance industry. It's a game with no rules and no referee, and that's why the public continues to lose in what is usually a blowout.

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

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