Insurers should be required by state regulators to base prices on sound actuarial principles rather than what consumers can pay, according to a report released Wednesday.
Insurance companies are basing their prices on what consumers are willing to pay—a practice called “price optimization,” according to a study by the Bipartisan Policy Center (BPC).
The BPC says in its report that this practice is harmful less-affluent customers.
“Poorer and/or less educated or sophisticated customers may not be sensitive to variations in insurance pricing due to lack of knowledge, or not having the time or ability to seek multiple insurance quotes or easy access to the internet, where different websites have made insurance pricing much more transparent,” said the report.
While calling for lower charges with bars on price optimization, the BPC said states generally should end insurance rate regulation and focus primarily on the viability of insurance carriers.
“Artificially low rates can threaten the solvency of insurers … and threaten policyholder protection,” said the BPC study.
State regulators should help consumers shop for insurance by publicizing firms’ claim histories, customer satisfaction surveys and other factors that would demonstrate the comparative value of policies, the group says.
In addition, the group said regulators should make disclosures simpler so consumers can see at a glance the key information on policies they are buying.
Too Big To Fail?
Looking at the ongoing battles in Washington D.C. over the dangers insurance firm failures could pose in a financial crisis, the BPC said the systemic risk of life insurance companies is much lower level than that of banking and other non-bank financial services.
With that in mind, the group urged the Financial Stability Oversight Council to focus on the insurance industry’s risky activities and products rather than designating large insurers as non-bank Systemically Important Financial Institutions (SIFIs)—namely, too big to fail.
“It is not clear the designation reduces systemic risk,” said Justin Schardin, the BPC’s financial regulatory reform initiative director, in a briefing accompanying the release of the report.
Ann Kappler, chief of external affairs at Prudential Insurance, said FSOC should be more of an advisory group.
Prudential is among a handful of life insurers that has been labeled as a non-bank SIFI by the FSOC, a collection of leaders from the nation’s financial regulators which was set up by the Dodd-Frank Act to provide an overview of dangers to the financial system.
Countering claims that Federal Reserve regulation of insurers designated as SIFIs would force bank-type rules on them, Michael McRaith, who was the first director of the Federal Insurance Office, said the Fed has broad discretion on what types of supervisory measures to use on them.
The BPC report said the primacy of the states in insurance regulation could be threatened by state insurance office budgets.
The budget problems have meant salary levels of insurance regulatory workers haven’t allowed the offices to hire people with the level of expertise they need, warned Terri Vaughn, former CEO of the National Association of Insurance Commissioners.
If the funding reductions could lead to noticeable problems, the study said, Congress could increase the federal role in regulation, including the possibility of an optional federal charter for insurance businesses.