Federal Insurance Office Emphasizes State Regulation ‘Inequities’

Author: Chris Boggs

“Protection of insurance consumers and access to insurance are critical to the functioning of a stable and fair insurance marketplace. Recognizing the significance of consumer protection, the Federal Insurance Office (FIO) has highlighted numerous consumer protection issues in its prior reports.” So begins the November 2016 FIO release, Report on Protection of Insurance Consumers and Access to Insurance.

Apparently the FIO has its sights set on becoming the protector of the insurance consumer, maybe in partnership with state regulators or to the exclusion of state regulation – it’s not clear. The introduction goes on to state, “This Report highlights some gaps and inconsistencies in state insurance consumer protections(emphasis added) and recommends a path forward in each instance”

The five topics introduced and discussed in the report are:

• Insurance and Technology. Big Data and cyber risk illuminate how technological developments applied in the insurance sector can create new opportunities for consumers, insurers, and state insurance regulators while also creating new risks such as cyber breaches.
  
  
• Environmental Hazards and Insurance. Insurance plays a significant role in addressing evolving environmental hazards. In particular, the Report considers insurance-related issues posed by human-induced earthquakes and climate change.
  
  
• Fairness in Insurance Practices. Insurers’ practices can raise fundamental questions of fairness. As examples, the Report considers the appropriateness of using marital status, sex, and gender in the underwriting of non-health insurance policies, and the detriment such practices may cause some consumers. The Report also examines the transparency of homeowners’ insurance coverage, and the problems that can arise when insurers increasingly use non-standardized coverage forms. Insurers also increasingly include mandatory arbitration clauses in insurance policies. Such clauses affect consumers in many sectors, not just insurance. The Report also examines how insurers renew (and cancel) policies after consumers file claims.
  
  
• Fairness in State Insurance Standards. Disparity in state insurance standards can give rise to a variety of consumer protection issues. This Report examines two key examples. First, the Report discusses the state insurance guaranty association system, including the inconsistent financial protection that policyholders in neighboring states may experience following the failure of an insurer. Second, the Report outlines developments in the workers’ compensation market, including the impact of ongoing legislative efforts in certain states on taxpayers and workers.
  
  
• Retirement and Related Issues. Insurance can assist consumers in achieving financial security – and raise consumer protection issues in the process. By way of example, the Report examines consumer insurance issues related to the later phases of life: retirement security, the secondary market for life insurance and annuities, long-term care insurance (in coordination with the Department of Health and Human Services), and unclaimed death benefits.

Regardless the FIO’s ultimate goal, points made in this report are valid and worthy of review on behalf of the insurance consumer (the independent agent’s clients). This article highlights three topics addressed in this report:

1. Big data and insurance;
2. Marital status as a rating factor; and
3. Workers’ compensation inequities.

Big Data and Insurance

Consumers can benefit from but also be harmed by the insurance industry’s use of “big data” according to the FIO. Possible benefits resulting from the industry’s use of big data include more individualized products and pricing, along with potentially greater access to insurance products. However, big data creates concerns for the FIO.

Big data factors about which the FIO is suspicions, and should concern consumers and agents, include:

• “Price optimization” schemes. Price optimization involves the gathering, analysis and use of data not related to expected losses to develop the final premium. In everyday terms, this is using information not traditionally used in rating a policy to develop the final premium. This could include information such as shopping habits, subscriptions, perceived tolerance for price changes or other information that allows the carrier to set individualized premiums rather than risk-based premiums. This practice is referred to as “price elasticity of demand.”

Fourteen states and the District of Columbia, as of 2016, have passed laws to prohibit or restrict the use of this non-traditional rating practice in personal lines. These include: California, Colorado, Delaware, Florida, Indiana, Maine, Maryland, Montana, Minnesota, Ohio, Pennsylvania, Rhode Island, Vermont and Washington.

• Data brokers. Data brokers purchase and sell personal information about consumers to help insurers and other businesses develop consumer profiles; and they also develop “derived data” about consumers based on purchases. FIO’s fear or issue with these data brokers is that they operate without much oversight and without transparency or accountability. The Federal Trade Commission (FTC) has recommended legislation be passed to address these issues.

• Unintentional discrimination. Buying habits and other data used to “segment” the market may unintentionally (or possibly intentionally) result in pricing or coverage discrimination because or buying habits correlated with race, gender, age, ethnicity or religion. Opponents of using buying habits or patterns state that a person’s buying habits is not significant or predictive and thus should not be used.

The FIO’s opinion of big data seems to be summed up in the statement, “[s]imply because data may be available regarding consumers does not mean that any data is relevant to determining the insurance premiums they should pay.”

In closing its big data discussion, the FIO chastises state regulators, saying, “With rare exceptions, state insurance regulators have not asserted regulatory authority over third-party vendors that provide insurers with pricing and rating tools. This failure results in a significant regulatory gap, which should be closed to prevent potential harm to individuals, families, and businesses.”

Marital Status as a Rating Factor

With this attack, the FIO is stepping on toes. Marital status has long been a rating factor in personal lines insurance. Part of the FIO’s attack is based on apparent inequities when the insured is divorced, widowed or in a domestic partnership. In FIO’s view, this practice penalizes otherwise safe drivers “for a personal legal status unconnected to driving.”

Several relevant questions are asked in the report regarding the fairness of using marital status. Two include: Is it fair for the victim of an abusive spouse who obtains a divorce to face higher auto insurance premiums for ending a dangerous relationship? Is it fair for a widow (or widower) to pay more for auto insurance after experiencing the loss of a spouse?

Actuarial data is likely available that proves that marital status is still a relevant rating factor; however, questions of “fairness” may push states to prohibit its use. Four states already prohibit the use of marital status in pricing auto insurance: Hawaii, Massachusetts, Michigan and Montana.

The FIO wants state regulators to reconsider the use of marital status as a relevant rating factor stating, “State insurance regulators should continue to assess whether marital status is an appropriate rating or pricing consideration for all personal lines insurance.”

Workers’ Compensation Inequities

Inequities in work comp benefits from state to state are of interest for the FIO. As is well known in the industry, each state establishes its own work comp rules and benefit levels that, according to FIO, are not meaningfully coordinated. The FIO gave this example, “an employee in Alabama who suffers the loss of a leg due to a workplace injury is compensated $44,000, while an employee in Nevada who suffers the same injury is compensated more than ten times that amount, at $457,418.”

It is unclear whether the FIO considered or accounted for the differences in living expenses among the compared states or how the states compared to those immediately contiguous. Regardless, the FIO wants states to evaluate the fairness of state-by-state differences in compensation

The FIOs Role in Insurance

According to this report, the FIO was established within the US Department of the Treasury to advise the Secretary of the Treasury on major domestic and international insurance policy issues in connection with all lines of insurance except health insurance. Beyond this role, the FIO is authorized to:

• monitor all aspects of the insurance industry (emphasis added), including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system;
• monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance;
• recommend to the Financial Stability Oversight Council (FSOC) (on which FIO’s Director serves as a non-voting member) that it designate an insurer as an entity subject to regulation as a non- bank financial company supervised by the Board of Governors of the Federal Reserve System;
• assist the Secretary of the Treasury in administering the Terrorism Risk Insurance Program, established in treasury under the Terrorism Risk Insurance Act of 2002, as amended;
• coordinate federal efforts and develop federal policy on aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors (IAIS);
• assist the Secretary of the Treasury in negotiating covered agreements and determine whether state insurance measures are pre-empted by covered agreements (emphasis added);
• consult with the states (including state insurance regulators) regarding insurance matters of national importance and insurance matters of international importance; and
• perform such other related duties as may be assigned to FIO by the Secretary.

Big “I’s” Stance on the FIO (Taken from the 2017 Legislative Conference)

The Big “I” remains dedicated to preserving the state-based system of insurance regulation and firmly believes that the attributes of this system dramatically outweigh any perceived inefficiencies. The Big “I” is concerned that some federal and international regulatory efforts could lead to an erosion of state-based regulation. As such, the association supports efforts to install stronger procedural “checks” for federal officials in international insurance negotiations. The Big “I” also supports significantly restricting or eliminating the Federal Insurance Office (FIO). The Big “I” agrees with the intention of Chairman Jeb Hensarling’s (R-TX) “CHOICE Act” to limit the powers and duties of FIO. However, the association is concerned that restructuring the current FIO into the new Office of the Independent Insurance Advocate could increase the stature of the Office and lead to day-to-day federal regulation of insurance in the future. The Big “I” also strongly opposes repeal of the McCarran-Ferguson antitrust exemption for the property-casualty or life markets.

Last Updated: May 24, 2017