Federal Insurance Office May Monitor and Advise, Not Regulate

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Insurance companies are calling for more federal regulation of home, auto and other property and business insurance! Have you entered a Bizarro World where the insurance industry’s primary goals are to keep insurance premiums low, promptly pay claims and ask regulators to take them to task when they screw up the math or they're taking in windfall profits? No such luck. When the insurance industry calls for federal regulation, they’re only doing it to escape tougher state oversight.

Consumer Watchdog submitted comments to the new Federal Insurance Office in the Treasury Department on Friday to oppose any federal interference in insurance regulation that would undermine strong consumer protections in the states.

Insurance regulation has long been the responsibility of the states. In California we have the toughest law regulating auto, homeowners and other property insurance in the nation, thanks to the landmark rules enacted in Proposition 103 over 25 years ago. Prop 103 has saved drivers $62 billion since 1988, and it is a Holy Grail quest for the insurance industry to try to eliminate tough oversight like California's by replacing it with a weaker federal standard.

The industry's latest attempt to create federal insurance regulation was in the Wall Street reform law. The insurance industry wanted to give the new Federal Insurance Office broad power to preempt state laws and weaken consumer protections. Congress for the most part said no, and gave FIO only limited authority to override state protections in very narrow circumstances.

Consumer Watchdog argued against any preemption authority because we knew that even with strict limits, insurers would use the mere existence of a federal insurance office as leverage to weaken state protections. But the law is clear: Congress gave FIO a mandate to monitor and advise, not regulate, and it should not overstep those bounds. In our comment letter, we cautioned new FIO director Michael McRaith against giving in to the deregulatory dreams of the insurance industry.

California’s system of prior approval regulation under Proposition 103 is a model for strong state-based regulation and consumer protection – including:

  • A prior approval system for most property and business insurance rates that requires insurers to seek permission from insurance regulators and justify rate increases before they take effect.
  • A limit or ban on rating factors that can be used to redline. Proposition 103 expands access to low-income and underserved drivers by requiring auto insurance premiums to be based primarily on three factors: driving record, miles driven, and driving experience. Good drivers receive an automatic 20% premium discount. Rating factors that have traditionally been used to redline consumers – including ZIP Code – may not have greater weight than any one of the top three factors. Other factors that serve as proxies for race or income, including lack of prior insurance and credit scoring, are prohibited.
  • A funded intervenor system that allows the public to challenge unnecessary premium hikes. Since 2003, Consumer Watchdog has saved $2.2 billion for drivers, homeowners and doctors by challenging unnecessary premium increase, and insufficient decrease, requests using the public intervention process.
  • An elected insurance commissioner accountable to the public directly for premium hikes. To ensure that Proposition 103's reforms would be properly enforced, it made the insurance commissioner an elected position accountable directly to the voters, not to a politician who may use the commissioner appointment to reward the insurance industry’s political support.

And we made suggestions for ways the Federal Insurance Office can use its unique resources to expose data and practices that the insurance industry currently hides from the public, and even from state insurance regulators.

FIO should investigate unfair and discriminatory insurance rating practices including:

  • So-called “pay-as-you-drive” and other usage-based insurance programs. The rating schemes for pay as you drive plans in most states are opaque, providing consumers with little information on the actual impact on premiums of miles driven, in relation to other factors. Usage-based plans that rate based on time of day, location, etc have a similar lack of transparency.
  • The use of prior insurance as a rating factor in auto insurance rates, and in particular how it effects the movement of drivers from uninsured to insured.
  • The primacy of insurance scoring in insurance rating, and how it affects access to affordable coverage in low-income and minority communities.

There is plenty of room to improve consumer protection for insurance customers across the nation, but FIO must recognize that no consumer should be forced to give up existing consumer protections just because insurance laws in some states lag behind.

Download Consumer Watchdog's comment letter here.

Carmen Balber
Carmen Balber
Consumer Watchdog executive director Carmen Balber has been with the organization for nearly two decades. She spent four years directing the group’s Washington, D.C. office where she advocated for key health insurance market reforms that were ultimately enacted into law as part of the Affordable Care Act.

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