NAIC ANALYSIS AND OPINION
Insurers and officials have strained trust
of agents and consumers
By Kevin P. Hennosy
The seeds of the next "Prop. 103" may have
already been sown and germinated.
The villagers have not yet taken up torches and pitchforks, but there are numerous signs of public discontent with insurers in the United States. Rising premiums for personal lines products, restrictive policies and an increasing dependence on faceless marketing methods have fostered a populist discontent among consumers and producers. Insurance executives will ignore the signs of discontent at their own commercial peril.
Insurance is a business based on trust. Insurers cannot build trust on a foundation of discontent. One does not need to be a public opinion consultant to read the signs of discontent in the public.
Brunswick, Missouri, is a small town in the central part of the state. The town is quintessential Midwestern. The population personifies the line that Bill Clinton used in so many stump speeches--the people of Brunswick "worked hard and played by the rules."
Like so many small town in the Midwest, the population of Brunswick is aging. Most only hope to have "fixed-incomes," but in truth their retirement incomes have shrunk with a fickle bond market. They would love to see a fixed income again.
These people do not lead risky lives. Their houses were paid off long ago. They do not run up huge credit card debt. They drive older cars that they bought "straight out" with cash.
Imagine their shock when they receive auto and homeowners insurance statements that announce a price increase of 40%, 60% or 100%. Imagine what that will mean to their monthly budget.
Most of the people of Brunswick will never know why their rates increased. Some might call the agent whom they have done business with for decades and ask: "Why?"
What they really want to know is: What can we do about this? How can we lower the price of insurance?
Their agent cannot help them. The agent explains that their premium increased because of a new method of insurance pricing based on their credit history.
That answer makes no sense to the average citizen of this average town called Brunswick. "What in the heck does credit history have to do with insurance?" The agent dutifully explains the supposed "correlation" between risk and credit. Credit history is a measure of risky behavior.
The retirees look at each other then look at their agent. They ask, "We live a risky lifestyle on retirement income in a town of 1,200?" This makes no sense. The Brunswickers' credit is good. Their debt is paid off. Something just does not look right.
Missouri Governor Bob Holden and his director of insurance, Scott Lakin, thought the whole credit-based underwriting and rating process looked funny too. Holden and Lakin supported reform proposals in the legislature that limited the use of credit history in underwriting, regulated it in rating and studied it from an independent perspective. Agent groups worked with Holden and Lakin in support of reform. Companies fought reform at every turn.
The companies won. A watered down bill was passed into law. The Kansas City Star called that bill, "a sad joke." The premium increases continued to land in mailboxes in Brunswick and across the state.
Company executives may not want to believe it but this chain of events will have a long-term effect on their business. The public loses trust in insurers, then loses trust in state government. Many turn their back on both, but some become radicalized. The seeds of the next "Prop. 103" may have already been sown and germinated.
Take for example the ballot initiative introduced in Colorado earlier this year. The initiative is a grassroots proposal nurtured by a small businessman from Denver named Jake Gaffigan.
Before starting a home building business, Gaffigan served as the spokesperson for the Colorado Division of Insurance. In that position, he earned a reputation for straight talk with reporters and innovative programs for public education.
After leaving the department, Gaffigan continued to monitor insurance regulatory issues. His discontent with market regulation activities and complaint handling led Gaffigan to call for a legislative audit of the division. Despite the pressure from the legislature, the performance of the department did not improve, in his opinion.
Gaffigan's experience both inside and outside the department led him to believe that the division was more accountable to insurers than the public at large. He looked at other states with appointed insurance commissioners and noted that they grew close to the regulated companies. Insurance regulators and insurers alike considered service as insurance commissioner much like major league baseball looks at its system of farm teams. He studied the experience of 12 states that elected insurance regulators and found that public accountability was undermined by insurer campaign contributions.
After several attempts, Gaffigan has succeeded in introducing a ballot initiative. The initiative will propose amending the state constitution to make the insurance commissioner an elected office. It will require candidates to forego soliciting or receiving contributions from insurers. A series of conflict of interest protections will apply to the elected commissioner, including a forfeiture of his or her ability to work for or represent insurance companies for five years after leaving office.
The initiative's provisions will require the commissioner to collect data from the industry concerning insurers' campaign contributions and lobbying expenses and to publish his or her findings. In addition, the state auditor would conduct a biennial audit of the insurance department's enforcement actions and publish the findings.
Most elected insurance commissioner systems date back to the Progressive/Populist movement of the late 19th and early 20th century. In 1892, the Peoples (Populist) Party platform vented public discontent. "The fruits of toil of millions are boldly stolen to build up colossal fortunes for a few; and the possessors of these, in turn, despise the Republic and endanger liberty. From the same prolific womb of governmental injustice we breed the two great classes, tramps and millionaires."
It was on this backdrop that an angry group of local fire insurance agents organized a national association. The agents fought company-dominated cartel efforts to restrict their business. They lobbied for state regulation of premium rates and policy forms. Today we know the association as the Independent Insurance Agents and Brokers of America (IIABA).
The IIABA has become a powerful political force, but it also has become removed from its scrappy heritage. The IIABA has joined the establishment and has not championed an unpopular cause. Even with regard to the credit score issue, the IIABA refused to take on the issue directly.
To see the real fighters, one must look to the Coalition of Exclusive Insurance Agent Associations (CEIAA). The coalition serves as an umbrella group for a number of associations that represent agents by company.
The plight of exclusive agents has deteriorated over the past two decades. At first, companies sought to control their agents by declaring them independent contractors. Companies often found it in their interests to do so. The Supreme Court ruled that insurers could deny retirement and other benefits to terminated independent contractors. Armed with such power, companies could exert a high level of control over their exclusive agencies.
More recently, some exclusive agents were deemed employees, which allowed companies to claim agents' books of business as company property. Legal control was traded for economic control in the opinion of some exclusive agent leaders.
The legal standing of agents has gifted companies with the ability to exert punitive authority over agents who stand up for their rights and the rights of others. In addition, many agents in the field resent what they feel is an implicit but constant threat from insurers: "We can replace you with a call center or a Web site."
Much speculation has occurred in agent circles concerning John Bryant, a former Allstate agent in Louisiana. At his termination, which was carried out in the presence of private security guards, the company informed Bryant that his appointment was ended because of "... your failure, as key person under the Agreement, to maintain a professional and businesslike relationship with the Company, and your agency's failure to meet business objectives established by the Company."
Bryant was not a cog in the machine. He was an active member of the Allstate Agents Association and the CEIAA. He protested the company's treatment of its agents that he believed was unfair. In addition, Mr. Bryant had initiated an effort to organize union representation for agents because he believes they need to stand together in the face of the company's power.
In addition, as reported in the February issue of Rough Notes, Bryant was an effective lobbyist for agent and consumer concerns. He testified in several state legislatures and had begun to lobby at the National Association of Insurance Commissioners (NAIC). He remains a nationally recognized expert on the use of credit history in underwriting and rating.
Since his termination, Bryant has not given up his efforts to improve the lot of insurance agents and consumers. He has accepted a position as an organizer with the Office and Professional Employees International Union and can be reached through www.agentsforfreedom.com.
Ballot initiatives and union organizing will seem radical to some, but Gaffigan and Bryant were pushed for a long time before they assumed their extreme positions. Insurers have to ask how many more Gaffigans and Bryants are out there. Company executives may want to believe that there are not too many "troublemakers," but discontent nurtures champions. *
The author
Kevin Hennosy, an insurance writer specializing in the history and politics of insurance regulation, covers the proceedings of the NAIC (National Association of Insurance Commiss-ioners) for Rough Notes readers. Hennosy began his career with Nationwide Insurance Companies and then served as public affairs manager for the NAIC. He has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States.