What the U.S. homeowners insurance market urgently needs is greater policy form standardization, with insurers taking their cues from independent rating organizations rather than their own underwriters–at least that's what University of Minnesota Associate Law Professor Daniel Schwarcz told the National Association of Insurance Commissioners at their recent meeting in Seattle, as reported by National Underwriter on Aug. 19 (see http://bit.ly/dBGYJi).
Professor Schwarcz's PowerPoint presentation to the NAIC–titled "Deficient Consumer Protection in the Regulation of Insurance Policy Forms: Evidence from Homeowners Markets"–asserted that homeowners insurance policyholders in 2010 have fewer financial protections listed in their policies, protecting them against a diminishing number of perils, than they did five- or 10 years ago.
That is simply not the case. While every homeowners policy provides a baseline of essential coverages–financial protection against losses arising from a fire, windstorm or theft–each insurer then distinguishes and differentiates itself in the market by offering an array of policies to suit the many and varied interests of their customers.
Over the course of many years, insurers have in fact added many coverages to the policies they sell to accommodate the needs of their policyholders.
Hundreds of competing homeowners insurers collectively offer policyholders thousands of options in the market today, insuring millions of homes. Yet Professor Schwarcz reaches the incredulous conclusion that Insurance Services Office forms are in "every case" more generous in the level of protection they offer. The reality is that consumers have options and are free to choose those that best suit their needs and budgets.
Moreover, independent agents and brokers, in Professor Schwarcz's view, have somehow concluded that the policy language in all homeowners policies are the same and willingly accept the idea that they're kept in the dark about what they're actually selling.
Agents would dispute this assertion. The U.S. homeowners insurance market is an incredibly competitive one, and independent agents and brokers understand the products they sell on behalf of insurers. They also understand they add value to the insurance transaction by knowledgeably explaining the differences between competing policies.
Homeowners insurers want independent agents and brokers to know the differences between them and their competitors. That's how they grow and maintain their business.
In addition, Professor Schwarcz's view that "insurance regulators have no idea what is going on in their state" when it comes to the policy forms they approve is a bit of a reach. State insurance departments nationwide provide essential consumer protections, and one of them is making sure the homeowners policy form passes a certain readability standard.
In other words, is the typical purchaser of a homeowners insurance policy going to understand what's in this document, especially the declarations page? Regulators and state lawmakers have insisted in recent years that the most important information (for example, details about a windstorm or hurricane deductible) be discussed near the front of the policy form, and insurers have agreed to make changes in that regard.
Besides approving policy forms and offering other consumer protections, state regulators monitor the solvency of the insurers that conduct business within their state. And if state regulators weren't good on the latter point, we would see insurer insolvency rates rising. In fact, just the opposite is occurring, with property and casualty and life insurer insolvencies a very rare occurrence.
One important function related to ensuring insurer solvency is overseeing premium rate changes in states that have prior-approval regulations or laws. Rate-making is the process of calculating a price to cover the future cost of insurance claims and expenses, including a margin for profit.
While the regulatory processes in each state vary, three principles guide every state's rate regulation system–that rates be adequate (to maintain insurance company solvency) but not excessive (not so high as to lead to exorbitant profits), nor unfairly discriminatory (price differences must reflect expected claim and expense differences).
Recently, in the coastal U.S. homeowners insurance market, the issues of availability and affordability–which are not explicitly included in the guiding principles–have been assuming greater importance in regulatory decisions. In addition, virtually all regulators need to approve forms before they can be used.
We can agree with Professor Schwarcz on the point that the average consumer may have a difficult time understanding the complexities of a legal contract between the policyholder and the insurance company once someone gets past the declarations page. That is a function of the fact that contract language is subject to interpretation by lawyers and the courts.
However, Professor Schwarcz and many of the homeowners insurers that are Insurance Information Institute member companies must agree to disagree on his primary thesis–the idea that a U.S. homeowners policy covers less today than it did five- or 10 years ago and that insurance regulators looked away while this occurred.
Robert P. Hartwig is President of the Insurance Information Institute, a nonprofit communications organization supported by the insurance industry. He may be reached at bobh@iii.org.
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