NU Online News Service, Sept. 15, 2:32 p.m.EST

WASHINGTON—The core of state regulation—market conduct andconsumer protection—was debated at a recent Senate hearing.

A congressional staffer says it is unlikely many insurers willbe subject to federal oversight through the new Dodd-Frank Act.

But, the official said it is unclear whether there will also beheightened and stronger state regulation as mandated by theDodd-Frank Act.

Daniel Schwarcz, a University of Minnesota law professor, saysstate insurance regulation “has generally failed at a core task ofconsumer protection regulation—making complex marketscomprehensible to consumers and broadly transparent to those whomay act on their behalf.”

This type of transparency is fundamental to “fosteringcompetitive and efficient markets,” he adds.

The comments were made at a hearing held by the SenateSubcommittee on Securities, Insurance and Investment of the SenateBanking panel. The hearing was on “Emerging Issues in InsuranceRegulation.”

Baird Webel, a specialist in financial economics at theCongressional Research Service, says the overall expectation isthat few insurers will be deemed systemically important by theFinancial Stability Oversight Council (FSOC).

This Senate subcommittee panel was created by the Dodd-Frank inorder to ensure that the failure of complex financial institutionsdoes not affect world financial stability.

Webel says it is unclear whether heightened oversight by stateofficials imposed under the law will ever take place, primarilybecause of problems at the non-insurance subsidiaries at AmericanInternational Group.

Webel says the act mandates that states impose additionaloversight of insurers because of the financial crisis, but thisprocess may take longer because National Association of InsuranceCommissioners (NAIC) model laws must first be adopted by theindividual state legislatures in order to take effect.

“This process can take substantial amounts of time and, inaddition, state legislatures are not required to pass the NAICmodels, as suggested by the NAIC,” Webel says. “This may alter theeffectiveness of the models or introduce variation in regulationamong different states.”

Within his testimony, Schwarcz says states do a poor job ofpromoting transparency in consumer-oriented property/casualty andlife insurance markets.

He says, “this failing occurs at two levels.” First, most statesdo not empower consumers to make informed decisions among competingcarriers, and second, there is a lack of publicly available marketinformation about carriers, Schwarcz adds.

For example, in personal lines markets—home, auto, and rentersinsurance—consumers have no capacity to identify or evaluate thesubstantial differences in carriers' insurance policies.

“Consumers cannot acquire policies before, or even during,purchase,” he says. “Instead, they receive them only weeks afterthe fact.”

Meanwhile, he says, “no disclosures warn consumers to considerdifferences in coverage, much less enable them to evaluate thesedifferences.”

“Similar deficiencies prevent consumers from comparing carriers'claims-paying practices,” and consumers neither receive nor canaccess reliable measures of how often or how quickly carriers payclaims, he continues.

Furthermore, consumers are not told about agents' financialincentives to steer them to particular carrier, Schwarcz adds.

“Given this collective lack of transparency, it is hardlysurprising that several large national companies have started tohollow out their coverage and embrace aggressive claims handlingstrategies,” he says.

On market issues, Schwarcz says carriers' terms of coverage arenot generally publicly accessible and company-specific marketconduct information—including data on how often claims are paidwithin specified time periods; how often claims are denied; howoften policies are non-renewed after a claim is filed; and howoften policyholders sue for coverage—is also hidden from publicscrutiny and treated as confidential.

“Virtually no states make available geo-coded, insurer-specificapplication, premium, exposure, and claims data, similar to thatrequired of lenders by the Home Mortgage Disclosure Act,” Schwarczsays.