Issues and Needed Improvements in State Regulation of the Insurance Business

Insurance consumer protection and regulation have been conducted on the state level since the passage of the McCarran-Ferguson Act in 1944. A study, which examined the resources and activities of the state insurance departments through a questionnaire to all states and a fieldwork sample of 17 states, found serious shortcomings in state laws and regulatory activities. Its primary focus was on regulatory issues involving automobile insurance, particularly price regulation, risk classification, and insurance availability.

In general, state insurance department staffs were small, salary levels were low in relation to those of professionals elsewhere, and little was spent to upgrade staff skills. Traditionally, the primary focus of state insurance departments was the financial condition of the companies; increasingly, however, attention has been focused on other consumer protection requirements. In 1974, the National Association of Insurance Commissioners sponsored a study of the operation of state insurance offices which found a number of deficiencies in the process of regulation. Recommendations made as a result of the study were not implemented by most state departments. The most severe shortcoming in the operation of state departments was the inability to process, rectify, and prevent consumer complaints. An examination of automobile insurance rates showed an inability of all but two states to recommend independently the appropriate level of insurance rates; a number of nonregulatory impediments to competition; and a correlation between lower rates and larger, better financed state insurance departments. Shortcomings were found in the abilities of departments to examine risk classification plans, in insurance availability rules, and in consumer accessibility to information on both of these. An exploration of the relative benefits and deficiencies of state, as opposed to federal regulation, showed potential problems with both. While the insurance industry expressed satisfaction with the status quo, serious problems exist in the way state departments have protected and educated consumers.