At the Federal Insurance Office meeting "Insurance Regulation in the United States: Modernization and Improvement," at the U.S. Treasury yesterday, a panelist suggested that if there's something missing from insurance regulation, it is rules that make for greater transparency. Perhaps a better point is that insurers can gain a competitive edge through their own efforts to make their product features, claims service and financial performance more transparent.
The panelist, Daniel Schwarcz, associate professor of Law at the University of Minnesota, said that the main tools of insurance consumer protection fall within a traditionally prescriptive approach that includes regulation of products through forms, price regulation, regulations governing claim settlement to ensure that they are made fairly, regulations ensuring that sales are suitable (Schwarzc's comments begin at 14:33 in the embedded video below).
"In pursuing this prescriptive approach very little attention has been paid to transparency," Schwarcz asserted. "Making sure that consumers have a reasonable basis for knowing what it is that they're purchasing, and knowing the differences among companies and among products."
Using the example of homeowners' insurance -- the product area he's most familiar with -- Schwarcz said that today consumers don't have the means of examining products and features from competing carriers, even though products can have many important differences. Schwarcz said:
One would think that the first rule of consumer protection would be to empower consumers to choose effectively among these competing products. But right now, insurance regulation does virtually nothing to accomplish this. This is hardly the only example. Right now it's impossible to ascertain whether one company pays more claims or pays claims more quickly than another company, even though that's the fundamental thing that insurance companies are there to do. I cannot choose among different carriers on the basis of their purported promises. Right now I can't tell whether or not one carrier is more likely than another carrier to non-renew me if I make a claim, or to cancel my coverage. Right now, I often can't even tell the price of life insurance coverage that one company is offering versus another because it's bundled together with savings components in ways that are completely non-transparent. Right now I can't even tell what my guarantee fund protection is if my product doesn't in fact pay. I can't tell what the financial rating of the company is unless I do my own independent research. So there's a tremendous lack of transparency.
There's room for argument as to which matters are best left to regulators, and Schwarcz himself said that the most powerful regulator, by far, will always be an informed market. That being the case, there's an opportunity for carriers to do a better job of explaining coverage options, claims performance and financial performance as a means of differentiating themselves.
The consumer insurance market has been dominated by price considerations, thanks to aggressive marketing by companies such as GEICO and Progressive. Insurers have much more to offer customers, and a far greater basis for a long and mutually beneficial relationship if they focus less on price, and more on the realities of the protection they offer. Allstate has made this point to consumers with their Dennis Haysbert commercials (see below) taking on the pure price competitors; New York Life has made a powerful the case for the virtues of the mutual life insurance model through the Guarantees Matters website and campaign.
But those carriers' efforts are just the beginning of communicating what insurance is and dispelling consumer myths and misunderstanding. The entire industry can gain from better explaining how insurance works, what can be gained through protection products, and just how much of a problem fraud is for both carriers and consumers. But more importantly from an individual carrier perspective, insurers have a significant opportunity to communicate their comparative advantage in terms of products, product features, claims service and financial performance.