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Daniel Schwarcz on the Lack of Transparency in Insurance Consumer Protection

posted by Nathalie Martin
Back in July of 2011, we were fortunately to have Dan Schwarcz guest blog for us. He has another article to report on, entitled Transparently Opaque: Understanding the Lack of Transparency in Insurance Consumer Protection, available here. His core argument is that state insurance regulation systematically rejects transparency-based consumer protection strategies in favor of either no regulation at all, or substantive regulation.  As a result, (i) insurance policies do not come along with summary disclosures; (ii) policy forms are not available online; (iii) consumer claims information is not publicly available; (iv) data on the availability of property insurance for low income or minority communities is not collected or made publicly available; (v) the price of life insurance is not reflected in a summary metric like the APR; (vi) consumers are actively shielded from information about the existence or extent of guarantee fund protection; and (vii) regulatory accounting information is only publicly available for exorbitant fees. 

In all of these cases, he argues, analogous regulatory issues at the federal level -- ranging from consumer credit products to health insurance to retail securities products -- promote robust transparency to both consumers/investors and the market more generally.

This insightful article, which I saw presented this summer, argues that insurance regulation needs to embrace the types of regualtion found in these other arenas,  which promote genuinely transparent consumer markets and which use substantive regulation as a complement to transparency where necessary. Check it out.


The problem with trying to move towards any Federal regulation is taking power away from individual state insurance commissioners who are extraordinarily sensitive to any Federal action, legitimate or perceived, into their domain. They view any action by the Feds as a gateway for future encroachment.

State insurance regulation does reject transparency in favor of (in some states) substantive regulation. That's a feature, not a bug. Transparency is a proven failure in consumer bank regulation, and the advocates of transparency remind me of the old lefties: "Transparency hasn't worked because proper transparency hasn't been tried." I have a little more faith in modern psychology than I do in Marxism-Leninism. But I have even more faith in the industry's ability to game any disclosure scheme.

Transparency and substantive regulation are not mutually exclusive. Ideally they should be used together, in ways that complement each other. Of course transparency is imperfect. But that does not mean that we should not work to empower both consumers and market intermediaries to understand the relevant market. It just means that we should not assume that we will always be able to do so in ways that completely eliminate the need for substantive regulation.

I do agree that transparency empowers market intermediaries. I therefore rather like the SEC scheme, apart from its peculiar ideological faith that transparency empowers individual investors. And hey, the costs of transparency are relatively low, industry kvetching notwithstanding. So there is not much lost if transparency is an ineffective approach.

I therefore don't object to transparency, except to the extent it displaces substantive regulation. I merely don't believe it works. So I'm fine with Dan Schwarcz's bottom line, especially as I acknowledge that I might be wrong.

Seems to me that having dedicated watchdogs with professional skills and the power of the state behind them (in terms of being able to audit books, subpoena records, sanction companies and so on) is far more effective than relying on (1) companies to tell consumers the truth and (2) busy consumers to weigh complex uncertainty issues like the possibility of the company being insufficiently capitalized to pay their claims at some time in the future.

Strong substantive regulation is THE best approach to issues that are not hugely important to consumers until something goes wrong.

healthcare system charges so much from the patient-doctor point of view. This is my attempt to address that lack and how it might be changed for the better with what we've got at hand, with a few tweaks.

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