A recent op-ed by Robert Hartwig, president of the Insurance Information Institute, misconstrues my research and recent testimony I gave at the National Association of Insurance Commissioners Consumer Liaison meeting in Seattle in August.
It is time to set the record straight.
In Seattle, I provided initial evidence based on a comprehensive review of the homeowners insurance market that insurance policy forms are not standardized, as they once were, and as many commentators and members of industry often assume they continue to be.
I reported that "almost all, but not all, deviations" from ISO forms "are downward deviations." The specific evidence I have found to date supporting this conclusion is detailed in my draft paper, "The Need For Insurance Policy Transparency," which is publicly available at http://ssrn.com/abstract=1687909, and which Mr. Hartwig does not address.
Both in my Seattle testimony and in my research, I have explored how it is virtually impossible for consumers to comparison shop on the basis of these pervasive differences in policy forms.
o First, insurers refuse to make their policy forms publicly available and will only provide consumers with those forms after they purchase coverage. Their generic descriptions of coverage in pamphlets and on websites are completely inadequate to allow informed consumers to compare the coverage provided by different carriers.
o Second, regulators generally do not even have complete copies of policy forms in their files. Even when they do, these forms are incredibly difficult for even the most diligent and informed consumers to access.
o Third, preliminary interviews with agents that I have conducted demonstrate that there is a widespread, though admittedly not universal, perception among both independent and captive agents that all homeowners policy forms are essentially the same.
o Finally, many of the insurers who use the most unfavorable forms also utilize captive agents, rather than independent agents, who are particularly unlikely to be knowledgeable or forthcoming about how different carriers' policy forms compare.
These findings, in my view, conclusively establish the need for insurance regulators, through the NAIC, to comprehensively review insurance policy transparency in personal lines markets. This potentially includes, among other things:
(1) Requiring insurers to make their policy forms publicly available.
(2) Improving presale disclosures to consumers about the content of different carriers' policy forms.
(3) Improving the readability, organization, and formatting of policy forms.
Although "greater choice" may indeed be valuable to consumers, true choice requires transparency.
(Editor's Note: Professor Schwarcz's use of the term "greater choice" refers to Mr. Hartwig's counterpoint, which appeared in the Oct. 11 edition of National Underwriter, titled "Greater Choice Key To Homeowners Market." In the counterpoint, Mr. Hartwig argued that standardization of policy forms is less desirable than the current situation–one in which he says hundreds of competing insurers offer "thousands of options," giving consumers freedom to choose those that best suit their needs and budgets.)
I agree with Mr. Hartwig that it is not sensible to mandate a one-size-fits-all-policy. But regulators and lawmakers should at least consider setting a mandatory minimum floor for personal lines policies. Doing this would ensure, as Mr. Hartwig claims (with no substantiation), that "every homeowners policy provides a baseline of essential coverages."
My research shows that this claim may no longer be accurate, depending, of course, on what one considers an "essential coverage." In particular, some prominent national insurers currently sell homeowners policies that dramatically cut back on insurance against such "essential" coverages as water damage, theft damage, damage from artificially generated currents, and liability stemming from underage drinking.
At the very least, wouldn't you like to know whether your homeowners insurer is one of these carriers?
Daniel Schwarcz is a professor of the University of Minnesota Law School.
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