Liaisons Highlight Consumer Insurance Concerns

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Consumer Advocates Focus on How Insurers Treat Insureds in Difficult Economic, Credit Climate

Insurance agents, brokers and regulators should be aware that when it comes to insurance, consumers are concerned with such issues as the use of credit scores in determining rates; purchasing policies over the Internet; compensation and disclosure; claims handling and fraud; among others, according to the 2009 consumer liaison representatives to the National Association of Insurance Commissioners (NAIC).

As the liaisons should know: they represent the interests of insurance consumers. NAIC’s consumer liaison representatives “embody a diverse range of experience and expertise with insurance-related matters,” said NAIC President and New Hampshire Insurance Commissioner Roger Sevigny. “Their unique insights will help shape regulatory decision-making — and ensure we keep consumers’ concerns at the forefront of our discussions.”

Credit Scoring Concerns

A key topic the representatives hope to discuss with the NAIC and see Congressional action on is the use of credit scores.

“We have already seen credit scores having an impact on interest rates charged to consumers on their credit cards and loans. If insurers continue to use credit scores in determining risk levels, premiums will increase and consumers may be forced to reduce the insurance carried to protect their financial assets,” the University of Texas’ Karrol Kitt said. “The use of credit scores in determining premiums needs to be fully vetted as to its true effectiveness in risk analysis.”

The University of Minnesota’s Daniel Schwarcz, University of Georgia’s Brenda J. Cude and Texas Watch’s Pamela J. Bolton, also expressed concern about the use of credit scores for underwriting, especially given the current economy when many consumers’ credit scores are going down.

“The credit crisis has already lowered the credit scores of thousands. As lenders lower credit limits and increase rates, consumers are seeing their credit scores suffer through no fault of their own,” Bolton said. She noted the “grave” situation has been documented by mainstream media outlets such as the Wall Street Journal, Fox News, Bloomberg, and others.

Bolton expressed doubt but hopes that the insurance industry will take into account differences between changes in credit scores because of the consumer’s own actions versus economic conditions or changes by lenders.

If insurers don’t take into account differences between changes in credit scores due to the consumer’s actions versus general economic conditions, consumers and insurers “will be worse off,” Cude warned. “It is already very difficult to explain to consumers how their credit score could be related to their access to insurance and the price they pay. It will be even more difficult to explain that when the drop in the credit score is due to, for example, their credit card company lowering their credit limit when the consumer’s behavior hasn’t changed in any way.”

Insurers that don’t pay attention or try to take advantage of the economic situation could pay a price. “One outcome will likely be a continued erosion of consumers’ faith in financial institutions,” Cude explained.

“This crisis presents the industry with a very important choice: Will it choose to act in the best interests of its customers, rather than its bottom lines, by embracing fair practices that don’t unfairly penalize policyholders, or will it be business as usual?” Bolton asked. “Only time will tell.”

Keeping the Faith

If consumers lose faith in their insurance providers, that will no doubt affect sales, especially Internet transactions. Many consumers prefer to purchase insurance coverage over the Internet. Web insurance purchases can be easy, as long as the Web site is consumer-friendly, providing policies that are understood, Kitt said. The process could increase the transparency of the insurance marketplace.

Yet when Web sites are used primarily as lead generators consumers aren’t being served, the representatives said. And if sites don’t offer services consumers expect from their experience with other online transactions, such as being able to check payments made, file claims, or make changes in their policy online, they could be discouraged, Cude said.

Furthermore, the recession could cause consumers to drop coverages. “Consumers already don’t understand what they’re buying when they buy insurance and how rates are set. If that’s true, they don’t know what they’re giving up when they drop their insurance coverage. … Unfortunately, many consumers probably use [the Web] simply to find the lowest price — which does not always mean they have found the best insurance product to meet their needs,” Cude added. “The question is how many consumers and which ones will drop insurance coverage and which coverage? And if consumers have lost confidence in financial institutions, the impact will be greater.”

Independent Agent Value

That’s why an independent insurance agent can play an important role in consumer transactions, the representatives said. Because independent agents sell products representing multiple insurers, “consumers can benefit from having more choice in their insurance protection, that is several policies to review for their insurance needs,” Kitt said.

“A trustworthy, ethical and truly independent agent who offers unbiased advice and guidance is an invaluable tool for consumers in our increasingly complex insurance marketplace,” Bolton said.

University of Minnesota’s Schwarcz cautioned against the independent agency system when contingent commissions are involved. “When it comes to contingent commissions and any sort of differential compensation paid to an agent I think is independent, I think there needs to be closer regulatory scrutiny to that,” he said. He noted that in his research, he’s found that a “lot of problems on the regulatory side, whether there’s less robust competition in insurance markets or claims handling, contingent commissions are at the root of a lot of problems. And I think it’s a joke to think that disclosure solves that, because even if you have effective disclosure, the underlying discontinuity in information from person to person when using an intermediary or independent intermediary is not a good solution.”

Schwarcz said he will encourage the NAIC to examine commissions and disclosure. “The assumption in the regulatory scheme, if there is a problem, is that all we need is disclosure. Disclosure works great for some things, but it’s not great for all things. It’s incumbent on regulators to think more carefully about when disclosure makes sense and when it does not.”

Ensuring Insurance Works

Schwarcz suggested the structure of state regulation was good but could be improved, and United Policyholders’ Amy Bach agreed. Her organization objects to an optional federal charter because insurance best meets consumers’ needs when it’s regulated at a level close to where transactions occur, she said. “We’ll lend our support to commissioners that want to preserve the state regulations system,” she said.

The Center for Economic Justice’s Birny Birnbaum said his group is interested in the debate over state versus federal regulation “and looking to see where consumers can get the best regulatory treatment. … Right now, the federal proposals are very anti-consumer.”

Birnbaum said while state-based regulation has its problems, “consumers still have better protection [with state-based regulation] than with any hypothetical federal approach … Having said that, we could certainly design a federal regulatory or national regulatory scheme that was better than what consumers get now with the state-based treatment. But that doesn’t seem to be on the table just yet.”

Part of the problem, Birnbaum said, is that the states and the industry don’t seem to know what they want. “On the one hand, the states say we don’t want the feds to regulate insurance and yet there’s a flood insurance program, there’s a terror insurance program, they want a natural catastrophe insurance program, there’s a crop insurance program.”

The industry doesn’t want the government to control its business, but it wants the government to step in on risks the private market has no interest in, such as flood insurance. “Insurance companies want a handout whenever they can get it. But regulators don’t seem to have a good idea about what role they want the market to play and what role regulation should play,” Birnbaum said.

“There’s no reason for private market not to be offering flood insurance or terror insurance or catastrophe insurance” he continued. “It’s done in other countries, and the governments in those other countries provide a backup in the event of a mega catastrophe.”

Bach mentioned disaster programs as an example of where a regional perspective has advantages over a national perspective. Her organization works with the California Earthquake Authority to improve its products and strengthen operations. “From a consumer advocacy perspective, when government insurance programs take on the role as insurers, we want them to be run well and meet consumers’ reasonable expectations of coverage,” she said. Bach believes her organization has helped the CEA with that process and has helped the California Department of Insurance, and hopes to share best practices with the NAIC to assist with other states’ disaster programs.

“We want to help export our success to other states as best we can, and brainstorm how to resolve failures,” Bach added, noting insurance is truly tested when a claim is made. “Our expertise focuses on what happens when a homeowner’s policy or business owners’ policy gets road-tested with a large loss. We hope to share with NAIC what sort of claims issues people are dealing with, what obstacles they’re dealing with, and what property insurance products are working as they are supposed to.”

The Coalition Against Insurance Fraud’s Howard Goldblatt hopes to improve anti-fraud efforts. He noted all consumers share in insurance fraud costs, so he hoped to share with NAIC what happens when someone tries to take advantage of the insurance industry.

“Having someone on the liaison committee with a background that understands insurance fraud issues and how it impacts consumers is a benefit when [the NAIC] discusses issues.”

Insurance Journal editors Stephanie Jones, Andrew Simpson and Ken St. Onge contributed to this story.

‘A Diverse Range of Experience and Expertise’

The NAIC consumer liaison representative program was established in 1992 to promote interaction with the NAIC’s members, the insurance industry and interested parties through the individuals’ dedication and commitment to serving the public interest. Thirteen of the representatives participated in the program in 2008, and three are new to the program in 2009. Goldblatt is an unfunded representative.

The 17 recently appointed consumer liaison representatives to the NAIC for 2009 are:

Betty Ahrens, executive director for the Iowa Citizen Action Network;
Amy Bach, executive director for United Policyholders;
Birny Birnbaum, executive director for the Center for Economic Justice;
Pamela J. Bolton, director of policy and research for Texas Watch;
Brendan M. Bridgeland, director for the Center for Insurance Research;
Brenda J. Cude, professor at the University of Georgia;
Evelyn Dacalos Gay (Langga), project director for the Elder Rights Project, Georgia Legal Services;
Bonita A. Kallestad, attorney at law for Mid-Minnesota Legal Assistance, Western Minnesota Legal Services;
Karrol Kitt, associate professor at the University of Texas at Austin;
Sonja L. Larkin-Thorne of Avon, Conn.;
Kevin P. Lembo, state healthcare advocate for the State of Connecticut, Office of the Healthcare Advocate;
Kevin Lucia, assistant research professor at Georgetown University;
Sally Baker McCarty, insurance and advocacy consultant with the National Hemophilia Foundation, Hemophilia of Indiana;
S. Colleen Repetto of Fair Insurance Rates in Monroe;
Daniel Schwarcz, associate professor of law at the University of Minnesota Law School;
Gregory D. Squires, professor of sociology and public policy and public administration at George Washington University; and
Howard Goldblatt, director of government affairs for the Coalition Against Insurance Fraud.