Issues and Needed Improvements in State Regulation of the Insurance Business

The background, purposes, and need for insurance regulation were reviewed in a study based on data obtained from a questionnaire sent to all state insurance departments, fieldwork in 17 state insurance departments, and industry sources. The resources and workloads of state insurance department surveillance of the financial condition and trade practices of insurance companies were also studied. A detailed analysis of the regulatory issues surrounding automobile insurance was conducted. Concern over the personal risk classification system which produces widely differing prices for the same coverage for different people warrants careful consideration by state insurance departments. Currently the only criterion for approving classification in most states is that the classifications reasonably reflect loss experience. Most state departments do not have sufficient information to evaluate whether or not the territorial boundaries used by insurance companies to establish territorial rates are fairly or accurately drawn. Geographic discrimination and underwriting practices affect insurance availability. With regard to alleged redlining, the arbitrary denial of insurance to everyone in a particular neighborhood, it was found that most states do not collect data or conduct studies to determine if the practice exists. Underwriting, which is more subjective than classification categories, may lead to consumer's being denied essential insurance because of unsubstantiated judgments. The propriety of some underwriting guidelines has been questioned, and GAO believes that it is important for insurance departments to protect consumers against unwarranted denials of coverage. It was found that state departments lack systematic procedures for handling consumer complaints, and need to improve guidelines for identifying insurers engaging in unfair business practices and procedures for monitoring insurance company claims handling. GAO believes that government regulation of the base price of automobile insurance might not be necessary, except in assigned risk plans, and that competition would efficiently achieve the lowest possible base prices. Alternatives available to remedy the problems of insurance regulation include: reform by the states, standby action through federal amending of legislation to allow federal establishment of specific standards, or repeal of the insurance legislation and active federal regulation.