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Meaningfully Shopping for Insurance is Next to Impossible

posted by Nathalie Martin

Anybody who cares about consumer rights should take a look at this recent article by Professor Dan Schwarcz, a law professor and insurance expert from the University of Minnesota Law School. This guy actually gets his jollies reading insurance policies, and what he has learned can help you. Well, sort of….. In reality, what he has learned can educate you, anger you, and hopefully motivate you to help solve a tricky problem, namely that consumers don’t generally get to see their policies until they’ve signed on. Policy terms also vary a lot, but no one seems to know this. It is a classic case of consumers shopping solely on the basis of price, when other things like coverage matter more. According to Professor Schwarcz, consumers have access to virtually no information about the things that matter most in an insurance policy. 

The New York Times blogged about Professor Schwarcz’s recent article shortly after we briefly discussed the article here on Credit Slips. Read the blog if you don’t have time to read the article. The NYT blog quoted Schwarcz, giving a great example of a coverage differential that could matter. Let’s say a standard contract insures a home against risk of “direct physical loss to property,” but some insurers alter the language to cover only “sudden and accidental” direct physical loss to property. The new wording could be used to deny claims for vandalism or from a threat that grew over time — say, an old tree that weakens and eventually falls on a house. It’s conceivable, he said, that the language could be used to deny claims for theft on the grounds that the loss wasn’t “accidental.”

Professor Schwarcz is now urging state insurance commissioners to post contract language online, so consumers can compare policies. Curious myself about how much I could learn about actual policy terms and coverage on line, I did a few test searches this afternoon while doing other things. How much did I learn? Not much, and now I am now getting spammed endlessly by insurance companies while trying to do, um, other things…like…..search for crust-less quiche recipes.  The recipe site was wrapped in all sorts of insurance ads.  Then…searching for lodging near Ghost Ranch (hope my dean is not reading this), more insurance ads along the side! Information is scarce, but there is plenty of spam.


How about shopping for Individual Health Insurance Policy?

Paul Krugman's (!!!) link makes an important connection, I think, between my work (and Nathalie's description thereof) and the issue of consumer-driven health care. The issue is complicated, though, because -- largely as a result of ACA -- we are doing a MUCH better job in the health insurance arena than we are in the property/casualty arena in promoting transparency. Although I’m skeptical that consumers can meaningfully shop for health insurance, the fact of the matter is that health reform gets us to the point where this at least might be possible soon. By contrast, no where near as much attention has been paid to this issue in property/casualty insurance markets.

It depends, to some extent, on the state you're in. Many states standardize their personal lines policies.

It's worth noting that an insurance policy has three dimensions, not two: price, contractual terms, and claims handling by the insurer. Claims handling is also opaque, although Consumer Reports tries to shed some light on the matter.

There is another, hidden dimension--underwriting--which affects the other three dimensions. If you underwrite only for good risks, you can afford to give both lower prices and better claims service. Conversely, an insurer like Chubb--whose motto in the industry is "if it's grey we pay"--is very expensive. Many people think that the currently-fashionable underwriting by credit scores is a way to sort by propensity to file a claim, rather than inherent risk.


Actually, what my paper shows is that the states studied (7 different states) DO NOT standardize personal lines insurance policies, despite the myth that they do.

As for your other points, you are correct. There is also essentially zero reliable information on specific company's claims handling as well, with the best being (i) complaint ratios published by the NAIC, and (ii) surveys such as JD Powers and Consumer Reports. State regulators actually collect a ton of company specific information that would provide an excellent basis to assess specific the claims handling of individual companies (i.e. how often are you sued for bad faith, how quickly do you pay claims, how often do you non-renew policies), but all of this information has been deemed confidential despite due to dubious trade secret claims by companies.

I recently switched health insurance plans. I asked to read the insurance contract before making a decision as to which plan to buy. I was told that this was forbidden by my otherwise helpful and adroit (online) insurance agent. I asked her, how this was possible? Curious and amazed that one could be "forbidden" by the insurer to read their contract of insurance before buying it, I called the (NYS) state commissioner of insurance to inquire about this. Most of the phone lines to the NYS state commissioner of insurance office simply ring and ring with no one picking up. However, I did eventually manage to get through to an employee after a few hours of phoning around, being put on hold or transferred to dead or unpicked up lines. This person told me, in a bored and annoyed tone, that it was perfectly standard that health insurance companies do not permit anyone to read their contracts of insurance prior to purchase of their contracted product. We the consumer, she said, however, had the glorious right to "rescind" our purchase of any new health insurance, provided, however, that we did so within 30 days of receipt of the contract of insurance in the mail. I asked her, how then is this helpful to one who is seeking to decide which insurance coverage to buy? After all, one can terminate insurance to anything, at any time at all by simply not paying one's monthly insurance bill and moving on. Furthermore, if one exercises one's right to "rescission," one is then stuck uncovered, and without any health coverage. Since before paying for new coverage one has to terminate one's old coverage. Then, being wholly uncovered puts you into a category in which your whole health status has to be entirely re-reviewed to get any new coverage at all. The whole thing is a racket and a fraud, in my humble opinion. There is no and can be no such thing as being bound to the terms of any contract that you have not been permitted to read before buying it.

This makes perfect sense. You have to pay for the policy before you can read it. Just like Congress had to pass the health insurance reform bill before they could read it. As Mr. Schwarcz notes, the industry is such a racket that the only possible reform by a captured Congress was yet another racket.

The entire notion that modern medical care should be funded with insurance that the consumer must purchase before getting sick is frankly ludicrous. The only rational policy, and one proven effective around the world, is single payer. Go ahead and include modificaitons that have worked well in Germany, Sweden and other countries, but universal coverage for basic medical care has to be the core policy. Everything else is a cruel hoax.

Very true. When shopping for E&O policies though I asked for advance copies and I received them. I was astounded how different the coverage was between the three or four companies I shopped. It was apples to oranges. It made me start looking more carefully at my commercial policy for my office as well as my homeowner policy

I think an even better bet than just to go to any one website would be to find a good auto insurance quote portal like http://www.insurance-comparisons.org that gives you different websites that each have comparison shopping available in them. This will give you and even wider range of options at your disposal.

I tihnk the point is that no matter where you look, which web site, which agent, you never know the true terms of your poicy until you pay for it, and you don't know if a company will pay your claim until you have a claim. That is the lack of transparency Prof. Schwarcz talks about.

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