Issues and Needed Improvements in State Regulation of the Insurance Business (Executive Summary)

PAD-79-72A: Published: Oct 9, 1979. Publicly Released: Oct 9, 1979.

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States have the primary responsibility for regulating the business of insurance. Critics charge the national insurance industry is not effectively regulated at the State level, and that the State insurance departments do not adequately protect consumers. State regulators, on the other hand, maintain that they do serve the public. GAO examined the resources and activities of the State insurance departments through a questionnaire to all States and fieldwork in a sample of 17 States. Each State has an insurance regulatory agency whose reponsibilities include licensing companies and insurance agents, maintaining a system of financial and trade practice regulation, and ensuring that rates are not excessive, inadequate, or unfairly discriminatory. They are also responsible for monitoring the compliance of insurance companies with legal requirements and for receiving and responding to consumer complaints. GAO reviewed numerous market conduct examination reports and found deficiencies in all of them. In general, the number of people with professional training on the staffs was small, little was spent to upgrade the staffs, and salary levels were comparatively low. The primary focus of the study was on automobile insurance, particularly price regulation, risk classification, and insurance availability.

Among the States reviewed, only two conducted analyses which enabled them to recommend an appropriate rate when companies asked for a premium increase, and these recommendations reflected actual loss experience more accurately than those of the insurance companies. If there were limitations on competition, regulation of rates would not be necessary. However, regulation to prevent unfair discriminatory pricing would still be appropriate. Most insurance departments have not analyzed the actuarial basis of personal classification by age, sex, marital status, and location. Nor have most departments determined whether loss experience justifies territorial boundaries or if refusal to insure due to location was a problem in their States. Although every State provides insurance for those otherwise unable to obtain it, these assigned risk plans are limited and have considerably higher premiums. The protection of consumer interests in obtaining insurance needs improvement. There are advantages for State regulation of insurance, but many insurance problems are national and there would be economies of scale in performing some functions centrally. It was found that about half of the State insurance commissioners were previously employed by the industry and the same amount rejoined it after leaving office. Furthermore, model laws and regulations were drafted with advisory committees composed entirely of industry company representatives.

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