The global financial crisis has undermined trust in financial institutions and reduced faith that market discipline alone can effectively regulate the behavior of firms. As a result, demands for consumer protections have increased and strengthening consumer protection regulation has become a cornerstone of financial regulatory reform. Both the federal and state governments have enacted significant new protections since the crisis. This renewed public and political interest in consumer protections and the heightened interest in reshaping the regulatory landscape provide a timely opportunity to rethink consumer protection regulation in insurance markets.
Consumer protections seek to keep in check insurers’ interactions with their customers, and the reach of consumer protection regulation is broad. Regulators oversee the entry of firms and agents into the market and the content of insurance policy forms. Advertising and marketing, pricing and underwriting, policy cancellation and nonrenewal, and the settlement of claims are also monitored. Regulator actions take on several dimensions including promoting market transparency, restricting specific behaviors, and enforcing compliance with rules.
Criticisms of state insurance regulation are numerous, but often focus on the reach and form of consumer protections. Critiques include a lack of coordination across the states, excessive regulatory cost burdens, and anti-competitive effects (Harrington, 2006). The regulatory process of market conduct supervision has been a particular target of criticism (Government Accounting Office, 2003; Klein and Schact, 2001).
State regulators and the National Association of Insurance Commissioners (NAIC) have been working for years to improve insurance market regulation. In 2003 the NAIC adopted an Insurance Regulatory Modernization Action Plan that established market analysis, market conduct and interstate collaboration as the three pillars of market regulation (NAIC, 2009). Nonetheless, change has proved time-consuming and the states are still working to define many specific regulatory practices. Coordination difficulties arise in part due to questions surrounding the role of the NAIC, which is a voluntary organization of state insurance commissioners and has no regulatory authority. As a result, many observers question the ability of state centered regulation to achieve needed reforms.
Leaving aside the question of whether the states or federal government should undertake insurance regulation, this paper identifies and discusses important principles that should be considered when designing consumer protection regulations in these markets. The paper proceeds by first describing the major forms of consumer protection regulation in insurance markets. Regulations are then evaluated in light of the economic rationale for consumer protections in insurance markets. Issues and challenges in regulatory design are identified, and alternative approaches are discussed.
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Rethinking Consumer Protection Regulation in Insurance Markets
