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Consumer Protection Strategies in Credit and Insurance: Why the Disconnect?

posted by Daniel Schwarcz

Many thanks to Credit Slips for inviting me to guest blog over the next week or so.  My hope during this time is to explore what I view as an important puzzle in consumer protection regulation: why it is that consumer protection strategies in insurance and credit are so different in the United States.  

From a consumer protection perspective, credit and insurance are intimately related.  At its core, consumer protection regulation in both domains is motivated by the fact that consumers routinely engage in complex financial transactions that they may not fully understand or appreciate.  And in both domains, firms or market intermediaries can exploit this fact to make additional profits in the short term, though such a strategy creates long-term legal and reputation risks.  Despite these similarities, consumer protection regulation in credit is predominantly concerned with disclosure and transparency whereas consumer protection regulation in insurance almost entirely ignores these tools in favor of more prescriptive regulatory approaches. 

In the credit arena, consumer protection is predominantly concerned with promoting genuine transparency so that consumers can make better decisions and consumer watchdogs can identify potential market problems.  Consider initatives aimed at disclosing the true costs of credit cards or making loan data publicly available.  Although the Consumer Financial Protection Bureau may adopt some more aggressive regulatory strategies, transparency and disclosure are nonetheless likely to dominate the new agency's efforts, as illustrated by the impressive new mortgage disclosure forms that it recently rolled out.   

By contrast, as I will explore in detail in my next several blog posts, consumer protection in insurance largely ignores transparency.  For instance, consumers cannot acquire insurance contracts on a pre-sale basis, disclosure rules regarding the content of insurance policies are haphazard and limited, and virtually no data is made publicly available with respect to core insurance concerns such as claim-denials, non-renewals, and the availability of coverage.  Instead, insurance regulators spend much of their consumer protection resources on regulating rates to ensure that they are not excessive and reviewing contract forms to ensure that they meet specific, narrowly-defined rules.   

From a purely descriptive perspective, there are various potential explanations for this disconnect, including path dependence or the fact that insurance is principally regulated at the state level. But the central question I hope to explore over the next week is whether these differences reflect a sensible approach from a normative perspective.  What I hope to show is that while insurance may warrant more prescriptive regulation than credit, it is very hard to justify the absence of regulation designed to ensure the transparency of consumer insurance markets.  



Keep it coming. This is very interesting stuff. In kind of a scarey way. Heh.

Interesting! Are you going to focus on the history of credit protection(usury laws, why they are no longer effective)

Agreed. Whatever the explanation, I find the breathtaking lack of transparency in the insurance market maddening, to say the least.

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