May 28, 2023
Health Insurance

A Call for Homeowners Insurance Reform

Professor Daniel Schwarcz has called for regulatory reform of the homeowners insurance market as noted in yesterday’s post, “Insurance Regulators and Lawmakers, Judges and Insurance Consumer Advocates Should Study Professor Daniel Schwarcz’s Work.” Unlike many who point out problems with no suggested solutions, Professor Schwarcz offered simple solutions that would dramatically improve consumer protections in personal lines property and casualty insurance.

 

In, My Final Post: A Recipe for More Effective Consumer Protection in Insurance Regulation Schwarz lists his suggestions:

(1) Promulgate a single policy that serves as a minimum baseline of coverage.

(2) Develop “nutritional labels” geared towards providing consumers with a basic sense of the degree to which a carrier’s policy provides greater coverage than the minimum baseline.

(3) Require prominent disclosure on the nutritional labels of several measures of claims paying quality, such as the percentage of claims denied, the average time within which claims are paid, and the frequency of non-renewal or cancellation within a year of a claim being submitted.

(4) Require full online disclosure of insurance policies, variables relating to claims payment, and data regarding the availability of coverage.

(5) Carefully consider the need to regulate risk classifications that have a disparate impact on underserved communities.

(6) Abandon all price regulation designed to suppress insurance rates, so long as a reasonable number of carriers exist in the marketplace.

(7) Promote the importance of independent insurance agents, but prohibit these agents from receiving different amounts of compensation based on the carrier with which they place consumers.

Professor Schwarcz promotes transparency of the property and casualty insurance markets. Last year he testified before the Senate Subcommittee on Securities, Insurance and Investment regarding “Emerging Issues in Insurance Regulation,” criticizing state insurance regulators for failing to protect insurance consumers. The record of his testimony included the following:

Currently, most states do a remarkably poor job of promoting transparent insurance markets. This failing occurs at two levels. First, most states do not empower consumers to make informed decisions among competing carriers. For instance, in personal lines markets – such as home, auto, and renters insurance – consumers have no capacity to identify or evaluate the substantial differences in carriers’ insurance policies. Consumers cannot acquire policies before, or even during, purchase; instead, they receive them only weeks after the fact. Meanwhile, no disclosures warn consumers to consider differences in coverage, much less enable them to evaluate these differences. Similar deficiencies prevent consumers from comparing carriers’ claims-paying practices. Consumers neither receive nor can access reliable measures of how often or how quickly carriers pay claims. Finally, consumers are almost never informed that ostensibly independent agents typically have financial incentives to steer them to particular carriers who may not provide optimal coverage. Given this collective lack of transparency, it is hardly surprising that several large national companies have started to hollow out their coverage and embrace aggressive claims handling strategies.

The second broad transparency failing of state insurance regulators involves the absence of publicly available market information…[T]his second form of transparency involves making detailed market information broadly available, typically through the Internet. Most consumers, of course, are unlikely to consult such information. But this form of transparency is nonetheless crucial for markets to operate effectively because it allows market intermediaries – including consumer-oriented magazines, public interest groups, and academics – to police marketplaces, identify problems, and convey relevant information to consumers, newspapers, and lawmakers.

Currently, insurance regulation does a dismal job of making publicly available the information that market intermediaries need to perform this watchdog role. For instance, carriers’ terms of coverage are not generally publicly accessible – insurers do not post their policies online and most insurance regulators do not maintain up to date or accessible records on the policies that different companies employ. Company-specific market conduct information – including data on how often claims are paid within specified time periods, how often claims are denied, how often policies are non-renewed after a claim is filed, and how often policyholders sue for coverage – is also hidden from public scrutiny and treated as confidential. Virtually no states make available geo-coded, insurer-specific application, premium, exposure, and claims data, similar to that required of lenders by the Home Mortgage Disclosure Act. Product filings with the states and the Interstate Insurance Product Regulation Commission (IIPRC) are not made public before approval, thus precluding public comment. And even companies’ annual financial statements are only accessible on the Internet for a fee, in notable contrast to the public availability of companies’ SEC filings.

In sum, state insurance regulation has generally failed at a core task of consumer protection regulation – making complex markets comprehensible to consumers and broadly transparent to those who may act on their behalf. This type of transparency is fundamental to fostering competitive and efficient markets. [emphasis added]

I wonder why honest and fair insurance companies would not accept his criticism and call for insurance reform? It seems natural that honest insurance companies would call for fair, open and transparent markets. Most of us know the types of businesses that want to operate in secret and not disclose the terms of their product or be subject to penalties for dishonest or unfair dealing.

 

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