difficulty and may even change from year to year. One prominent former commissioner has pointed out that in some states "the agent's license is merely a revenue raising service for the state." Another commissioner, Samuel H. Weese of West Virginia, told me on March 14, 1970: "Although it's not par for the course, I know of companies who have 75 percent turnover on their agents" This all adds up to having many agents, with little or no training, being turned loose on the public to sell insurance. More important, the lack of understanding even among agency forces, does not bode well for the level of consumer understanding.

Insurance, therefore, is different from most other products, because of its ability to generate public misunderstanding at all levels. Such a typically uninformed public is especially susceptible to all the typical abuses that the market place is heir to.

Lack of Countervailing Power

The consumer faces the complexities of the insurance market without the kinds of protective cover that might be expected from forces that should be operating. The press has become an important source of consumer protection by its new found propensities for investigative reporting. Yet, it has done relatively little to bring public understanding to the insurance process or to expose and alleviate consumer insurance problems. The same forbidding technicalities that frighten the consumer also seem to have an adverse effect on press coverage of insurance problems. (A more complete discussion of this problem is represented in a document, included as Appendix 1 to this statement.)

Other usual sources of countervailing power are also not fully operating in the insurance arena. Unions have made elegant noises about increasing automobile insurance rates, but have rarely mustered much expertise, especially in the property liability insurance area. Recently unions have become interested in group property and liability insurance, but their main impact has been on life, retirement, and health insurance, which up to now has been their main area of concern in collective bargaining. In the great struggle over providing an adequate center city insurance market, unions have often been notable for their silence. For example, the District of Columbia's problem was among the most serious in the nation. Yet, when the District of Columbia held extended hearings on the subject, no union witness appeared. There was little visible union effort to shape the study of the President's National Commission on Insurance in Riot-Affected Areas. Many other examples could be cited to support the conclusion that unions, contrary to what might be expected, have not had a significant effect on protecting the consumer interest in insurance.

The legal profession, with its special expertise, might be expected to be in the forefront of the battle to protect the consumer interest in insurance. Its talent, however, is simply too expensive to become involved in the great bulk of run-ofthe-mill problem cases. There is minimal access to services like group legal practices and the class action which would make it possible to effectively utilize legal talent to solve consumer insurance problems.

The lawyer generally finds no important source of income in insurance litigation unless he represents an insurance company or a plaintiff with a substantial policy claim. As a result, most lawyers are not knowledgeable in matters of insurance law relating to the typical coverage or other consumer problems. There are not enough economic opportunities to develop this kind of expertise.

This lack of countervailing power is nowhere more evident than in the legislative process. When insurance laws are being revised, there is at least one insurance lobbyist for every jot, tittle, and title in the statute. But consumer, union, or other lobbyists are often not there, and the daily press can rarely seem to find a bombshell in the labyinthine technicalities of an insurance code. Even the state legislators cannot ordinarily be effective in this process, as they are usually operating without trained staff and may view themselves as lucky to even have secretarial assistance. I recently discussed this matter with some Nevada legislators who noted that their legislative process produced many hearings when a new insurance code was considered, but that the hearings produced only an endless and almost uninterrupted list of insurance witnesses. The legislators felt the public viewpoint was not represented and finally called for a special study of the law from a consumer point of view.

A preliminary report on the study of the Nevada law is enclosed as Appendix

Allen L. Mayerson, "An Inside Look at Insurance Regulation," Journal of Risk and Insurance, March 1965, p. 70.

2 of this statement to indicate the kinds of consumer oriented questions that may not be raised in most insurance code revisions.

Other potential sources of countervailing power such as the organizations of insurance manager and the academic community, have also not produced the countervailing power that might otherwise be expected. (For a more detailed discussion of countervailing power and insurance regulation, see Appendix 3 of this statement).

Does State Insurance Regulation Protect the Consumer?

Anyone who says state regulation is adequate to protect the consumer is deliciously naive and possessed of fairy-tale faith.

Regulators-state, federal or any other--simply do not have the time and resources even if they have the inclination and capability to protect the individual

consumer.

5

Federal agencies have often shown the same ineptitude of state agencies. As a special report in Business Week summarized the status of federal regulation: . . something has gone wrong at all the great agencies with the delicate feedback from the economic organism under regulation. The thermostat is stuck, the businessmen alike will soon feel the heat."

The ability to protect the consumer

The opportunities and avenues for abuse are so many and varied that the regulator cannot be expected to detect and correct them all on a case-by-case basis.

Even if he had adequate resources, the insurance commissioner would be more than swamped with resolving general problems rather than resolving individual complaints. The insurance regulator is now overwhelmed with a whole menagerie of crises that will keep him committed for years to come. The problem of providing an adequate market for property insurance in center city areas has only begun to be resolved, and the solution to the shortage of crime insurance has not even been adequately discussed. Automobile insurance poses an ever-widening problem facing ever more inadequate solutions. Medical malpractice insurance is in such short supply at such high rates that it may drive physicans from the practice of medicine. Other malpractice lines have already developed similar problems or are rapidly on their way to doing so.

The jumbo jets have spotlighted a growing shortage of liability insurance, which is also evident in the area of products liability insurance. The inadequate property insurance market is even receiving attention from a White House Task Force. Life insurance has not resolved its problems of adequate disclosure of price information and the very existence of health insurance is threatened. Added to these and other problems are some dramatic shifts in company organization with the rise of the holding company and the encroachment of the conglomerate. Upstream dividends to holding companies amounted to almost a billion dollars last year. States are still operating with antiquated insurance laws, in need of reconsideration by the regulator, and modernization. Insurance regulators are willing to admit the basic problem facing them. A trade publication reported that the insurance commissioner of Illinois said that he had to find

answers to many of the shortcomings and abuses within the industry. He particularly referred to hard core areas and the fact that the manner in which some companies handled their obligations entitled them to nothing less than a "failing grade."

"It will take a long time to restore public confidence and heal the bad public relations created by these incidents."

He concluded that "changing times have caught up with insurance marketing and methods." "

Commissioners have to apply their limited resources on these major problems and cannot be expected to give individual consumer complaints individualized attention. Even some of the smaller states, like Nevada, which have not been overwhelmed by urban insurance problems, have noted problems in handling complaints. The 1967 Annual Report of the Commissioner of Insurance of Nevada states:

The handling of policyholder's service requests is still an ever increasing burden on our limited number of personnel in this section. In order to continue providing this service to the insurance buying public, it will be February 28, 1970. p. 61.

Insurance Exchange Magazine, February 1970, p. 4.

necessary to increase the number of personnel handling these matters and to upgrade the personnel classifications thereof.

An extensive survey conducted by Professor Stone, of complaint departments of state insurance commissions, found that 21 departments "feel that they are prevented from handling complaints effectively because they do not have an adequate staff." Stone found that only a few departments feel that they are adequately staffed. He summarized the results of his survey as follows:

Nearly all of the departments are short of help and are unable to handle adequately the volume of complaints that they receive daily. To complicate the problem further, the number of complaints that the departments receive is increasing each year.

His study as well as others have confirmed that insurance department staffs, not only the complaint division, are often understaffed, underpaid, and underqualified.

Other personnel problems also impair the adequate handling of consumer complaints. Former Commissioner Mayerson of Michigan has pointed out that many states:

must rely on the attorney general's office for legal advice. . . . However it is rare that the attorney general is sufficiently well-versed in insurance law, or has the time to provide the legal counsel required by the insurance commission who is not himself a lawyer.

Professor Stone also concluded that the shortage of legal personnel prevented state insurance commissioners from protecting the consumer. He noted that the "shortage of legal aid is so critical that the departments hesitate to hold hearings." Professor Mayerson has pointed out that insurance departments may be reluctant to use their power. He stated:

99 10

In such a hearing, the highly competent legal and actuarial talent available to the insurer may be able to present a much stronger case than can the insurance department relying, as it often must, on low-salaried personnel and a part-time attorney to present its side of the argument." There is not only lack of resources for adequately protecting the insurance consumer, but also sometimes the lack of inclination to do so. Regulatorsstate, federal and local; honest and dishonest; able and incompetent-tend to be captured by the industry they regulate. The process has been described by a former chairman of the Securities and Exchange Commission:

Part of the process of becoming a "captive" may stem from the fact that the parties are dealing with the industry day to day and begin to appreciate their problems without taking due account of the public interest. This same problem was explained in another way by the Landis Report on Administrative Agencies:

Irrespective of the absence of social contacts and the absence of undue hospitality, it is the daily machine-gun-like impact on both agency and its staff of industry representation that makes for industry orientation on the part of many honest and capable agency members as well as agency staffs. The insurance commissioner, who heads the state insurance department, often comes from the ranks of the industry and intends to return to the ranks of the industry upon conclusion of his term. In preparing for this testimony, I looked through the 1968 Directory of Insurance Commissioners prepared by the National Association of Insurance Commissioners.

Alphabetically considered, this directory indicated the Commissioner of Alabama was in the insurance business 13 years before his appointment. The Commissioner of Alaska was in the insurance business for 15 years prior to his appointment. The insurance commissioner of Arizona was in the business 24 years prior to his appointment. This was an auspicious start and I found about 17 commissioners with insurance industry experience totalling over 132 years. This does not include Commissioners with other obvious connections with the industry that were not indicated in the directory, such as legal counsel of insurance interests.

Gary K. Stone. "An Analysis of the Complaint Handling Procedures of the State Insurance Departments." A Ph. D. Dissertation in Business and Applied Economics at the University of Pennsylvania (1966), p. 27.

8 Stone. "A Trend in Complaints Processed by State Insurance Departments." Journal of Risk and Insurance, June 1967. n. 231.

Allen L. Mayerson. "An Inside Look at Insurance Regulation," Journal of Risk and Insurance, March 1965, pp. 58-59. 10 Stone. Ph. D. Dissertation, p. 193.

11 Mayerson, p. 59.

The Basic Deficiencies of Regulation

State insurance regulation often gets a bad report-card. But other kinds of economic regulation are winning no prizes. This may be a deficiency of regulation, as well as perhaps a simple affirmation of the fact that we cannot expect too much of regulation.

The statement of the 1960 Senate Report on state regulation is still painfully true:

The basic defects of state regulation discussed in the Patterson Study in 1923 are still apparent in current activities and operations of state insurance departments. Many of the defects of state regulation catalogued in the Final Report of the TNEC parallel, and, in various respects, duplicate the conclusions of this subcommittee report.

Subsequent investigations of the Senate Anti-Trust and Monopoly Subcommittee have also continued to highlight many of the same chronic deficiencies catalogued almost half a century ago.

These deficiencies have not miraculously disappeared. State regulation has undoubtedly improved, but the problems it faces have become much more severe in recent years.

Just as many of the substantive problems of insurance regulation have hung on with grim tenacity, so have the shortcomings of the commissioner's office. Regulation will be imperfect for a long time to come. We salute the states for the real improvements in state regulation recently accomplished. But the consumer is interested in having his problems solved here and now, not in admiring the grand evolution of our system of economic regulation. We should be looking for new methods of helping the insurance consumer with some sense of urgency.

ARE THERE SERIOUS ABUSES IN THE INSURANCE MARKETPLACE CALLING FOR NEW AND MORE EFFECTIVE REMEDIES?

One need not be critical of state regulation in asserting that there are many abuses in the insurance marketplace that indicate the need of new initiatives to protect the consumer. This is so despite the fact that all of the states have adopted unfair trade practices acts, most of which closely follow or coincide with the Model Unfair Practices Act approved by the National Association of Insurance Commissioners in 1947, and despite the existence of insurance regulation in every state and U.S. jurisdiction.

Some Particular Problems

One of the most recent abuses is the development of phony mail order insurers that are selling to corporate buyers. A trade publication, Business Insurance, was influential in exposing some of these companies operating out of Missouri. Its exposé led to action against so-called minimutals operating beyond their authority. In the meantime, buyers all over the world, from as far away as Ethiopia, suffered damage as a result of the operations of these phony companies, which wrote insurance but did not pay their claims.

In its most recent issue (of March 16, 1970), Business Insurance has a further report on questionable business activities.2 The report indicates that only last month the Missouri Secretary of State ordered the forfeiture of the charter of a "minimutual" based there. It was exposed by Business Insurance about 15 months ago. Appendix 4 contains excerpts from Business Insurance on this and related matters. The managing editor of Business Insurance advised me that its reports on this matter have not yet been contradicted by anyone.

Similar problems were disclosed in the 1963 hearings on surplus lines insurance before the Senate Anti-Trust and Monopoly Committee of the Judiciary of the United States Senate in 1963.13

This particular problem is noted for several reasons. First, it shows again that even the most sophisticated corporate insurance buyers run into trouble in the insurance marketplace, ranging from phony companies on down. Second, it shows that many serious problems of the insurance marketplace are perennials. There is a tendency to think that after a certain amount of talk and investigation a problem is solved, but in fact it turns up in some new form, or even in its original form. Third, it illustrates a problem that state regulation has always had a difficult time in controlling due to the interstate and international scope of some of these operations.

12 March 16, 1970. p. 1. (Advance galley proof is included in Appendix 4.)

13 The Insurance Industry: Surplus Lines Insurance, Part 11.

A closely related and perennial problem is that of mail-order insurance in the mass markets. Just as the corporate insurance market has been prey for phony companies and improper claims practices so has the mass market.

The Subcommittee on Frauds and Misrepresentations Affecting the Elderly to the Special Committee on Aging of the United States Senate reported on January 31, 1965 that

Economic pressures on older Americans are causing many to turn to mailorder health insurance offered by marginal companies which distort or omit facts in order to suggest that the policy gives more protection than it really does... Wide opportunities for deception or confussion exist in sales of health insurance policies, and buyers are usually dependent upon the good faith of the seller for accurate interpretation of provisions."

There have been many studies, investigation, and administrative actions since that time. The problem has been worked on but not solved. There is still a serious problem of abuse from mail order insurance, despite favorable rulings from the the United States Supreme Court affirming the power of the commissioner to reach unauthorized insurers. As Samuel H. Weese of West Virginia, one of the new breed of able, young commissioners, told me on March 14, 1970: "I have no first-hand knowledge of how serious the mail-order insurance problem was five years ago, but I do know it is still serious today." This is another unsolved problem of insurance regulation.

As marginal companies have preyed on the aged for health insurance, so they have preyed on those who are considered bad risks by automobile insurance underwriters. In 1965, the Senate Anti-Trust and Monopoly Subcommittee initiated an investigation of high risk automobile insurance. The hearing volume of that investigation compiled a great deal of evidence on fraudulent insurance company operations and consequent damage to thhe public.15

Senator Dodd summarized the findings of that investigation as follows:

The hearings and our investigations show that during the last 6 years, 73 companies writing motor vehicle insurance have been placed in liquidation or receivership.

We found during our investigations that nearly all of the insolvencies were caused by specific acts of dishonesty practiced by company management, or management's failure to act in the best interests of the company and its policyholders."

16

Senator Magnuson, in May of 1969, stated that since 1958, no less than 109 automobile insurance companies and 18 fire insurance companies have become insolvent.1

Finally the testimony of the Nixon Administration on S. 2236 indicates that the consumer is losing $25 million a year due to property and liability insolvencies, mainly involving automobile insurers.18

Another insurance consumer problem of equal tenacity with the rest is that caused by credit life and health insurance. This area of abuse involves the complications of insurance stacked on top of the "complex calculations and complicated forms" that characterize the credit industry.

This problem has a history running back almost to the beginning of the period of real growth of the credit life and health insurance in the United States. Until 1950, the business was characterized as of "modest" proportions. Since then both the industry and consumer abuses therein have experienced rapid growth.

As early as 1954 abuses in the credit life and health insurance were being investigated by the Senate Anti-Monopoly Subcommittee (under the late Senator William Langer). Abuses are still rampant, and in 1967 the Senate Anti-Trust and Monopoly Subcommittee engaged in an extensive investigation of credit insurance. It found a whole series of abuses, which were partially summarized by the then insurance commissioner of Vermont:

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20

(1) Fantastic profits are being made from the incidental sale of insurance in connection with loans and other credit transactions.

14 Frauds and Deceptions Affecting the Elderly: Investigations, Findings and Recommendations, p. 47.

15 The Insurance Industry. Part 12. High-Risk Automobile Insurance.

16 Congressional Record, January 26, 1967. Vol. 113, No. 11.

17 Congressional Record, May 23, 1969, Vol. 115. No. 85.

18 Statement on Behalf of the Department of Commerce and Transportation Before the Senate Commerce Committee, February 10, 1970.

19 See four volumes of testimony and documents on Hearings on the Consumer CreditCredit Insurance.

20 Hearings on Consumer Credit Industry, Part 1, p. 68.