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My Final Post: A Recipe for More Effective Consumer Protection in Insurance Regulation

posted by Daniel Schwarcz

Many thanks to Credit Slips for providing me with the opportunity to discuss some of the key consumer protection issues in insurance regulation.  As I hope I have shown over my short stint here, there is much that needs to be done in this important area, which often receives less attention from academics and the press than consumer protection in credit. 

I thought I would close by offering a simple set of recommendations for dramatically improving consumer protection in property/casualty insurance markets.  Here is my basic recipe, which would need to be separately implemented for each line of coverage:

(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.

The rationales for most of these recommendations should be relatively clear from my earlier posts.  The one exception, which I will briefly address here, is my suggestion that price regulation designed to suppress rates be abandoned -- a position that some may interpret as "anti-consumer."

Ultimately, my reading of the evidence is that most personal lines of coverage are quite competitive in the sense that multiple carriers exist and barriers to entry are relatively limited.  To the extent that the underlying regulatory framework were rationalized to allow consumers to make genuine choices among different carriers on the basis of coverage, I am confident that competition would effectively keep overall prices low (although it certainly might produce risk classifications that placed an unfair burden on particular groups).  Moreover, the overwhelming evidence, in my view, shows that most of the time regulation designed to suppress insurance rates in personal lines of coverage ends up proving ineffective, harmful, or both.  For a good overview of this research, see this summary.  Although counterexamples may exist (California is often cited by consumer advocates), my view is that regulation designed to suppress rates is often too highly politicized to be conducted effectively by regulators. 

In any event, that's all the time and space I have for now.  Thanks again to Credit Slips and to all of you readers who have offered comments, many of which have been quite illuminating. 


Can you please write on something you touched on, which is the types of policy forms?

I was in a lawyer's office years ago (A guy you might know) and he took one look at my policy and said "Oh, it's such and such form".

I'd like to know more about that.

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