Insurance regulation in the United States is overly complicated, unreasonably difficult, and at times it’s totally politically motivated because everyone wants to keep their job or get a better one. The system of state regulatory agencies is redundant, and it seems like it does little more than perpetuate bureaucratic red tape.
Above all that, it’s the best possible system that this country could possibly have.
Let me back up a little and lay some groundwork. One of the hallmarks of the United States is the push-pull relationship between the authority of the states and the federal government. This conversation about which level of government is best equipped to handle the needs of the people predates this nation and it is no closer to being settled today.
Until 1851, each state legislature handled regulating insurance within the state. Let’s be realistic. The insurance world simply didn’t need a regulator because the insurance part of people’s lives wasn’t that big. For most people, the only insurance policy they might own, or need, would be a fire policy on their home or barn.
Life insurance wasn’t widely purchased until the mid-1800s. Later in the 1800s there would be carriage liability policies, but again, most people didn’t buy much insurance. Insurance was something rich business people needed, not regular people.
In 1851, things began to change when the first insurance commissioner was appointed in New Hampshire. It only took 20 years for most states to follow suit and either elect or appoint an insurance commissioner. That’s when the insurance commissioners decided to band together and form the National Association of Insurance Commissioners (NAIC) so that they could gather, talk about insurance, and cry together about all the problems in their states. That, and to think about how they could help their states by drafting model laws for their states to consider.
We could dive into court cases, laws and the evolution of insurance regulation, but it is enough to say that each state has its own insurance department with an insurance commissioner at its head.
Several states have an elected insurance commissioner while the other states have an appointed commissioner. Insurance commissioners, and the offices they operate, have an important job function. It doesn’t matter how they put it on their websites or what they say, everything they do can be boiled down to one thing. It’s their jobs to make sure that the people who need insurance can buy and use insurance.
Let’s break down the job of insurance regulators.
They need to balance solvency and affordability.
One of the most difficult conversations that I ever have with my friends that aren’t insurance geeks (yes, insurance geeks can have real friends), is centered on the cost of insurance.
Insurance companies need teams of actuaries with terabytes of data to accurately come up with a price for an insurance product and even then, it’s little more than an educated guess. It’s not like the coffee mug sitting on my desk. The person who made it knows how much the materials cost, how much their time is worth, and how much they want to make for each mug sold. Insurance just doesn’t work that way.
That’s why the insurance department needs to pay close attention to what insurance companies are charging people.
While they need to make sure that rates are not excessive or unfairly discriminatory, most of the time insurance departments should leave companies alone if they file high rates.
You might be concerned that when one company files higher rates and they are approved, that other companies will follow suit. Don’t worry about that. It will happen.
Someone will find out that Company X got a rate 15% higher than Company Y. Then Company Z will file a rate that’s another 15% higher than Company X and the cost of insurance will go up. But that’s not the end of the story.
Another company will see the rest of them fighting for higher rates and more premium and will eventually file a rate that is significantly lower than the others and will try and gain market share through the “we’re the best price in town” marketing plan.
High prices eventually balance out because not everyone is on the same page and when someone decides that they can win by charging less, they will. That’s in addition to what happens when customers look at their insurance bills and get angry with what they’re paying and call someone else. Then they lower their limits or buy their insurance from somewhere else. Eventually, the strain of the high rate shows on the companies, and they lower their rates.
It’s more important for the insurance department to watch when companies are filing lower rates. Lower rates might be great for the consumer on the front end, but those lower rates require a closer eye on the policyholders’ surplus that the company maintains.
Companies need access to cash because that’s the product they are selling, and they need that cash to issue checks for when bad things happen. We buy insurance because we can’t afford to replace things that get broken or pay the bills that come in when we break things.
The insurance department needs to pay very close attention to the solvency of each company, which might mean they need to revisit minimum capitalization requirements that might have been set 25 years ago. As costs go up (which they do) the amounts paid out by insurance companies go up. That tells us that they need to make sure that every company has money in the bank to handle the claims that are coming.
Additionally, insurance departments need to watch smaller and newer companies closer than they do. By newer, I mean a company that hasn’t been tested by a significant catastrophe, whether that’s a property insurer in Florida that hasn’t had a difficult hurricane season or one that hasn’t had to deal with a California wildfire season. This will vary based on the line of business and state, but it’s a terrible situation for a consumer when their insurance company is suddenly gone, and their claims aren’t getting paid or are getting a percentage paid by the state guarantee fund.
They need to balance coverage and exclusions.
There are a ton of bad reasons why people buy insurance.
The state told me I had to. The bank told me I had to. My uncle is my agent.
The biggest reason that people buy insurance is to receive money when the bad days happen. It’s for the auto accident that leaves someone injured and their car out of commission. It’s for the day that you went to the grocery store and came home to find your neighbors and the fire department sifting through the rubble of your house.
We don’t buy insurance just to buy it and have a company say that the loss isn’t covered.
This is where the insurance department must step in. It is their responsibility to make sure that the consumer is protected when the insurance company either tries to file a form that doesn’t cover the losses that people will face, or when they try and interpret the policy so that there is no coverage or less coverage.
Policies need exclusions. There’s no way around them. There are some losses that an insurance policy cannot pay for. It’s not sound insurance application to pay a claim because someone failed to maintain their home. It’s not sound insurance application to pay a claim when someone intentionally burns down their building. It’s also not sound insurance application to reduce a claim based on “that’s what we’ve always done.”
The insurance department should step in and look for the most consumer friendly (but still correct) interpretation of the policy as possible.
If the loss is clearly excluded, that’s one thing. If the loss isn’t paid for any other reason, that’s something else. This is one of the reasons that we need insurance departments. Because people will disagree on coverage.
For example, a recent claim that I heard about included additional living expenses. The insured sent their insurance company an invoice for internet service at their temporary living situation. The company said they don’t pay for that kind of additional expense because it’s an ongoing expense. The policy doesn’t define what an additional living expense is, so we are forced to work with a common definition of an additional living expense. That leaves us to wonder with the insured what is an additional living expense if a new monthly expense isn’t?
When an insured has an issue with their insurance company, the insurance department should be looking at the same policy and asking this question: How can we reasonably interpret this policy in the best possible light for the consumer? Certainly, we wouldn’t want the insurance department to twist the policy into saying something that it didn’t. But that’s not the same thing as interpreting the policy in the best possible light for the consumer who, in good faith, makes an insurance purchase so that when something bad happens, there is money available to make the bad thing less bad. That bad thing might be when a family can’t live in their home and it costs them more to live somewhere else for a period of time that’s out of their control.
They need to balance insurability and responsibility.
Insurance in many ways ought to be a totally voluntary market, but since some people wouldn’t voluntarily buy insurance and some insurance companies wouldn’t voluntarily insure some people, there are laws in place that require both to meet up somewhere in the middle.
From a regulatory perspective, there seems to be great focus on affordability and availability of insurance in most markets. The problem is that affordability and availability are only part of the equation.
Let’s be clear about it. It is important that insurance companies make insurance available to as many customers as possible at a rate that they can afford. But there’s more to that statement than just make the insurance company price insurance so people can afford it. Pricing insurance isn’t just science. There’s an art to it and that’s because it deals with the risk of loss to something, and people are always involved in the loss.
Insurance companies have to take into account the coverage provided, and the insureds that are being covered. This means that the insured is a variable in what the insurance will cost. This is where the responsibility aspect of the equation comes into play. The insured has a part to play in what their insurance will cost.
I know, you’re going to say how often you hear the refrain, “I’ve been paying for this for years and never had a claim. Why does the cost keep going up?” There’s not a simple answer to that, but part of it is that people are paying a part of the cost of other people’s insurance, especially when we try and make it affordable for some.
There should be some risks that are simply uninsurable. Some people are just terrible drivers, and they should not be allowed to drive a vehicle until they take an in-depth driving course. Some buildings are uninsurable because they might fall over if someone leans on them too hard.
The regulators’ job in this case is to find that balance point between affordability and availability and those risks that should be excluded from the standard market.
Insurance is complicated and it should be the job of insurance regulators to inform the public about insurance.
Regulators should not be on the side of the industry or the public too much. They should exist to help find a balance point between the two.
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