Liaisons Keep Consumers’ Insurance Concerns at the Forefront

Loss of Faith in Insurance Providers Would Affect Sales, Advocates Say

Insurance agents, brokers and regulators should be aware that when it comes to insurance, consumers are concerned with such issues as the use of credit scores in determining rates, purchasing policies over the Internet, compensation and disclosure, claims handling and fraud, among others, according to the 2009 consumer liaison representatives to the National Association of Insurance Commissioners (NAIC).

The consumer liaisons should know. Even though they hail from diverse backgrounds, the advocates all have one thing in common: They represent the interests of the insurance consumer on state and federal levels.

Credit Scoring Concerns

A key topic the representatives hope to discuss with the NAIC and see Congressional action on is the use of credit scores.

“We have already seen credit scores having an impact on interest rates charged to consumers on their credit cards and loans. If insurers continue to use credit scores in determining risk levels, premiums will increase and consumers may be forced to reduce the insurance carried to protect their financial assets,” the University of Texas’ Karrol Kitt said. “The use of credit scores in determining premiums needs to be fully vetted as to its true effectiveness in risk analysis.”

Other representatives including the University of Minnesota’s Daniel Schwarcz, University of Georgia’s Brenda J. Cude and Texas Watch’s Pamela J. Bolton, also expressed concern about the use of credit scores for underwriting, especially given the current economy when many consumers’ scores are going down.

“The credit crisis has already lowered the credit scores of thousands. As lenders lower credit limits and increase rates, consumers are seeing their credit scores suffer through no fault of their own,” Bolton said. She noted the “grave” situation has been documented by several mainstream media outlets, including the Wall Street Journal, Fox News, Bloom-berg and others.

Bolton expressed doubts that the insurance industry would adjust for changing credits scores because of the economy. Yet if insurers don’t somehow take into account differences between changes in credit scores due to the consumer’s actions versus general economic conditions, consumers and insurers “will be worse off,” Cude warned.

“It is already very difficult to explain to consumers how their credit score could be related to their access to insurance and the price they pay,” she said. “It will be even more difficult to explain that when the drop in the credit score is due to, for example, their credit card company lowering their credit limit when the consumer’s behavior hasn’t changed in any way.”

And insurers that don’t pay attention or try to take advantage of the economic situation could pay a price. “One outcome will likely be a continued erosion of consumers’ faith in financial institutions,” Cude said.

“This crisis presents the industry with a very important choice: Will it choose to act in the best interests of its customers, rather than its bottom lines, by embracing fair practices that don’t unfairly penalize policyholders, or will it be business as usual?” Bolton asked. “Only time will tell.”

Keeping the Faith

If consumers lose faith in their insurance providers that will no doubt affect sales, especially transactions that take place via the Internet. Many consumers prefer to purchase insurance coverage over the Internet. Web insurance purchases can be easy, as long as the Web site is consumer-friendly, providing policies that are understood, Kitt said. The process also has the potential to increase the transparency of the insurance marketplace.

But when Web sites are used primarily as lead generators, consumers aren’t being served. And if sites don’t offer services consumers expect from their experience with other online transactions, such as being able to check payments made, file claims, or make changes in their policy online, they could be discouraged, Cude said.

Furthermore, the economic recession could cause consumers to drop coverages. “Consumers already don’t understand what they’re buying when they buy insurance and how rates are set. If that’s true, they don’t know what they’re giving up when they drop their insurance coverage. … Unfortunately, many consumers probably use [the Web] simply to find the lowest price — which does not always mean they have found the best insurance product to meet their needs,” Cude added. “The question is how many consumers and which ones will drop insurance coverage and which coverage? And if consumers have lost confidence in financial institutions, the impact will be greater.”

Independent Agent Value

That’s why an independent insurance agent can play an important role in consumer insurance transactions, the representatives said. Because independent agents sell products representing multiple insurers, “consumers can benefit from having more choice in their insurance protection, that is several policies to review for their insurance needs,” Kitt said.

“A trustworthy, ethical and truly independent agent who offers unbiased advice and guidance is an invaluable tool for consumers in our increasingly complex insurance marketplace,” Bolton said.

But University of Minnesota’s Schwarcz cautioned against the independent agency system, especially when contingent commissions are involved. “When it comes to contingent commissions and any sort of differential compensation paid to an agent I think is independent, I think there needs to be closer regulatory scrutiny to that,” he said. He noted that in his research, he’s found that a “lot of problems on the regulatory side, whether there’s less robust competition in insurance markets or claims handling, contingent commissions are at the root of a lot of problems. And I think it’s a joke to think that disclosure solves that, because even you if have effective disclosure, the underlying discontinuity in information from person to person when using an intermediary or independent intermediary is not a good solution.”

Schwarcz said in 2009, he would encourage the NAIC to examine commissions and disclosure. “It’s incumbent on regulators to think more carefully about when disclosure makes sense and when it does not.”

Ensuring Insurance Works

The Center for Economic Justice’s Birny Birnbaum said his group is interested in the debate over state versus federal regulation, “and looking to see where consumers can get the best regulatory treatment. … Right now, the federal proposals are very anti-consumer.”

Birnbaum said while state-based regulation has its problems, “consumers still have better protection [with state-based regulation] than with any hypothetical federal approach that we’ve seen. Having said that, we could certainly design a federal regulatory or national regulatory scheme that was better than what consumers get now with the state-based treatment. But that doesn’t seem to be on the table just yet.”

He believes the debate will be ongoing. Part of the problem, Birnbaum said, is that the states and the industry don’t seem to know what they really want. “On the one hand, the states say, ‘we don’t want the feds to regulate insurance,’ and yet there’s a flood insurance program, there’s a terror insurance program, they want a natural catastrophe insurance program, there’s a crop insurance program.”

The industry, too, doesn’t want the government to control its business, but it wants the government to step in when it comes to risks the private market has no interest in, such as flood insurance. “I know insurance companies want a handout whenever they can get it. But regulators don’t seem to have a good idea about what role they want the market to play and what role regulation should play,” Birnbaum said.

“There’s no reason for private market not to be offering flood insurance or terror insurance or catastrophe insurance,” he continued. “It’s done in other countries, and the governments in those other countries provide a backup in the event of a mega catastrophe.”

Insurance Journal editors Stephanie Jones, Andrew Simpson and Ken St. Onge contributed to this story.

Topics Agencies Legislation