NAIC “Appeasement” Proposal Would Undermine Consumer Protections Throughout Country

Los Angeles– Consumer advocates with the Foundation for Taxpayer and Consumer Rights (FTCR), the leading insurance consumer advocacy organization in the nation, joined other advocates today to condemn a proposal by state insurance commissioners to effectively deregulate insurance companies, leaving consumers unprotected in areas such as rates and the investigation of insurers handling of claims.

In a meeting this week in Dallas, the National Association of Insurance Commissioners’ (NAIC) — a body comprised of regulators from each state but funded by the insurance industry — will decide whether to develop a set of national standards for insurance regulation that would be dramatically weaker than the regulatory systems in place in many states, including the nation’s largest insurance market, California. California’s regulatory system, among the most rigorous and consumer oriented in the nation, stems from the 1988 voter-approved ballot Proposition 103, written by FTCR President Harvey Rosenfield.

According to advocates, the scheme for national standards would, in effect, deregulate the insurance industry and appease the insurance lobby, which has long sought to avoid the strict regulations of states such as California.

“The National Association of Insurance Commissioners has concocted a plan which would effectively deregulate the insurance industry at the state level through a toothless system of insurance company self-regulation,” said Rosenfield. “The NAIC scheme takes a ‘lowest common denominator’ approach in which the state with the weakest regulatory system and fewest consumer protections would become the standard model for insurance regulation nationwide.”

In California, for example, state lawmakers recently passed legislation to place the Commissioner’s examinations of insurance company misconduct on the internet, but the NAIC proposal would allow companies to perform “self-critical” examinations that would be kept secret from the public. The California law was established in the wake of the resignation of former Insurance Commissioner Chuck Quackenbush, who allowed the devastating contents of these exams to remain secret, protecting insurers from public awareness of their misbehavior and shielding the companies from hundreds of millions of dollars in fines.

“The NAIC plan for insurer evaluations is the logical equivalent of suggesting that students should grade themselves rather than allowing teachers a role in their academic assessment,” said Douglas Heller, consumer advocate with the Foundation for Taxpayer and Consumer Rights.

In its “Speed to Market” proposal, the NAIC seeks to dump California’s rate review and approval system in the name of uniform standards which do not allow for meaningful protections against insurer price gouging. California law, in accordance with Proposition 103, requires that all insurance rates are approved by the Insurance Commissioner prior to implementation, and rate changes may be subject to public hearings.

FTCR is calling on the NAIC to move, instead, in the direction of more meaningful protections from insurance companies. Rather than the devolution of regulatory protections as proposed by the current NAIC plan, there should be an effort to improve and strengthen protections with such policies as:

• a prior approval system for setting insurance rates to ensure that rates are neither excessive, inadequate or unfairly discriminatory;
  

• a ban on ZIP Code-based insurance rates
  

• a policyholder bill of rights which ensures fair and timely settlements of claims;
  

• a low-cost auto insurance program for low-income drivers, such as the California “Lifeline Auto Insurance” plan sponsored by FTCR and enacted recently in California;
  

• automatic publication of market conduct examinations or settlements of exams to inform the public about insurance company behavior;
  

• conflict of interest rules that do not allow insurance commissioners to take contributions or gifts from regulated entities; and
  

• a Policyholder Protection Association to ensure that consumers have a voice at the regulatory table.

“The NAIC plan to abandon virtually all regulatory power over insurance companies should alarm advocates and elected officials throughout the country who have worked for years to develop meaningful and effective consumer protection standards,” said Heller. “Under the guise of standardizing insurance regulation, the NAIC offers consumers the antithesis of regulation, a race for the bottom in which the most industry-friendly system wins and the public loses.”

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NAIC “Appeasement” Policy is Deregulation in Disguise

Statement of Harvey Rosenfield and Douglas Heller

of the Foundation for Taxpayer and Consumer Rights*

Monday, September 11, 2000

That the insurance industry wishes to escape effective regulation is nothing new. What has changed is that the industry is now willing to accept what it once considered anathema — a national “regulation” scheme –because, in effect, it would be in practice the same as deregulation. In a blatant effort at appeasement, the National Association of Insurance Commissioners (NAIC) has concocted a plan which would effectively deregulate the industry at the state level through a toothless system of insurance company self-regulation. This system would use a “lowest common denominator” approach in which the state with the weakest regulatory system and fewest consumer protections would become the standard model for insurance regulation nationwide.

The Foundation for Taxpayer and Consumer Rights (FTCR) has fought for insurance consumer protections for 15 years. In 1988, California voters established, through ballot Proposition 103, a strict regulatory system to ensure fair insurance rates. The examples of how California consumers will lose under the NAIC’s proposal are numerous. Presently, California requires that all insurance rates are approved by the Insurance Commissioner prior to implementation, and rate changes may be subject to public hearings. This protection against price gouging is threatened by the NAIC approach put forward by the NAIC. So are standards for licensing agents and brokers, as is the system for investigating the behavior of companies. If the NAIC plan is adopted, insurers will threaten to pull out of states such as California unless the state adopts the less rigorous, “uniform standards” of the NAIC.

For example, the California Legislature recently passed a law that requires the internet publication of market conduct examinations covering insurers’ unfair claims practices, because Californians want more information about companies’ behavior. The NAIC suggestion for these essential examinations moves in the opposite direction with a system that would allow companies to perform “self-critical” examinations rather than subjecting companies to examinations by departments of insurance. This is the equivalent of suggesting that students should grade themselves rather than allow the teachers to have any role in their academic assessment.

California has learned all too well the dangers of a system that neglects the interests of consumers in favor of those of insurance companies. Under California’s former Insurance Commissioner, Chuck Quackenbush, market conduct examinations were concealed, misdealing companies were not held accountable and consumers were left unprotected and harmed. But that was the result of the corruption of a politician, and he has resigned. The NAIC plan would dismiss consumer protections as a matter of policy by establishing a national set of rules that contravene the expressed public interest in a fair and accountable insurance industry.

In fact, the public demands more meaningful protections from insurance companies. Rather than the devolution of regulatory protections as proposed by the current NAIC plan, there should be an effort to improve and strengthen protections with such policies as:

• a prior approval system for setting insurance rates to ensure that rates are neither excessive, inadequate or unfairly discriminatory;
  

• a ban on ZIP Code-based insurance rates
  

• a policyholder bill of rights which ensures fair and timely settlements of claims;
  

• a low-cost auto insurance program for low-income drivers, such as the California “Lifeline Auto Insurance” plan sponsored by FTCR and enacted recently in California;
  

• automatic publication of market conduct examinations or settlements of exams to inform the public about insurance company behavior;
  

• conflict of interest rules that do not allow insurance commissioners to take contributions or gifts from regulated entities; and
  

• a Policyholder Protection Association to ensure that consumers have a voice at the regulatory table.

The NAIC plan to abandon virtually all regulatory power over insurance companies should alarm advocates and politicians throughout the country who have worked for years to develop meaningful and effective consumer protection standards. Under the guise of standardizing insurance regulation, the NAIC offers consumers the antithesis of regulation, a race for the bottom in which the most industry-friendly system wins and the public loses. The NAIC should be pursuing more, not less, government oversight into the affairs of insurers in an era in which S&Ls will be underwriting auto policies and stock brokers will be paying disaster claims.^

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* FTCR is a California-based non-profit, non-partisan research and public education organization. Harvey Rosenfield is President of FTCR and authored California’s insurance reform Proposition 103; Douglas Heller is a Consumer Advocate with FTCR. For more information, contact Douglas Heller at 310-392-0522 x 309, or visit our web site at http://www.consumerwatchdog.org.

^This era began with the Gramm-Leach-Blilely Act of 1999 which broke down the between insurers, bankers and investment houses.