Action Needed to Address State-Based Insurance Regulation

With the latest insurance industry market conduct problem, consumers once again see not only the failure of state insurance regulation to protect them but the refusal of state insurance regulators to take responsibility for their failure. The latest actions by state insurance regulators do not address the systemic problems with market conduct regulation and amount to closing the barn door after the horses have escaped.

The broker fee scandal is the latest in a line of major insurance market conduct abuses NOT discovered by state insurance regulators. From the mid 1980s on, virtually every major market conduct problem has been identified by consumers through litigation or by aggressive state attorneys general. The list includes life insurance churning and replacements, race-based premiums, single premium credit insurance, insurance credit scoring and more.

Now, New York Attorney General Eliot Spitzer has uncovered not only a system of contingency fees rife with conflicts of interest for brokers, but a bid rigging scheme to inflate insurance premiums and brokerage fees. We note that Mr. Spitzer thanked Superintendent Serio for his assistance, but who’s the insurance regulator here?

The state-based insurance market surveillance system is still incapable of identifying market problems and protecting consumers from many market abuses. How could such a bid rigging system escape the notice of regulators in 51 jurisdictions for years? More troubling, did regulators know about contingency fees and simply decide it was not a problem worth addressing? That is a distinct reality, given the efforts of some regulators whose fight against class action lawsuits is based on the notion that regulators must have exclusive jurisdiction over the insurance industry without accountability to the public for their regulatory action or–more to the point–regulatory inaction. Simply stated, these regulators want insurance regulators fenced off from any accountability for their failure to protect consumers.

Even though most insurance regulators come from and go to employment with the insurance industry, we believe the vast majority are committed to protecting consumers. Given this commitment, how could a bid rigging system involving the largest insurers, brokers and commercial customers occur and continue for years? As with other major market conduct problems that regulators were late to the dance for, the regulators should take responsibility for the failure, admit the problem should have been found and stopped sooner and study why their market conduct systems failed to reveal these problems. It’s long past time for regulators to hire an independent consultant to find out why major market problems are not discovered by regulators–regulators who have all the advantages to being the first to know.

We have not seen an acknowledgement of the systemic problem with state market conduct regulation and a strategy to address those systemic problems.

The brokerage fee bid rigging scandal should also be a wake-up call to regulators and legislators about the myth of competition in insurance markets. The market for large commercial insurance policies should be the most competitive of all insurance markets because the buyers are sophisticated and knowledgeable–particularly compared to consumers purchasing auto and homeowners insurance–about insurance coverage, policy language and pricing.

The National Association of Insurance Commissioners (NAIC) push towards commercial lines deregulation–and the National Conference of Insurance Legislator’s slavish devotion to “open competition”–both look ill-advised now. Wouldn’t regulators have discovered something by reviewing rate filings–like major increases in broker fees and commissions for certain lines of commercial insurance–that might have prompted an inquiry or otherwise led to discovery of these price collusion practices?

We call on NAIC to take the following actions:

1. Hire an independent consultant to research and report to state insurance regulators and the public why insurance regulators are too often the last to discover important market problems;

2. Review and revise rate and form model laws to reflect the evidence that market forces alone fail to protect insurance consumers; and

3. Create greater transparency with disclosure of all agent and broker fees and commissions.

The Center for Economic Justice has been a strong supporter of state insurance regulators in front of federal and state legislators and has worked to improve market conduct surveillance and regulation. We ask Pennsylvania Commissioner Diane Koken, NAIC president and other regulators to take decisive action to address the systemic problems with state-based market regulation and to show us that our confidence in you has not been misplaced.

Birny Birnbaum is executive director of The Center for Economic Justice, a non-profit advocacy and education center in Austin, Texas, dedicated to
representing the interests of low-income and minority consumers as a class on economic justice issues.

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