Explainer Episode 21 – How is Insurance Regulated?
How is insurance regulated in the United States? How are emerging technologies disrupting the industry? And what issues do policymakers face regarding privacy concerns in our era of big data?
Ian Adams joins the podcast to answer these questions and more.
[Music and Narration]
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Jack Derwin: Hello, and welcome to the Regulatory Transparency Project’s Explainer Podcast, which is part of RTP’s Fourth Branch podcast series. My name is Jack Derwin, and I’m Assistant Director of RTP.
Today, I’m excited to be joined by Ian Adams to discuss the regulation of insurance and the current disruption occurring in the industry. Ian is Executive Director of the International Center for Law and Economics. His work centers around the disruptive impact of burgeoning technologies on law and regulation, and he has particular expertise in automation and the future of work, privacy, and, of course, today’s topic: insurance.
Thanks, Ian, for joining us today. How are you doing?
Ian Adams: I’m doing well, Jack. Thanks for having me.
Jack Derwin: Of course. And, with that, we’ll get right into it. So this should be an easy one. Why are we talking about insurance today?
Ian Adams: Well, I mean, insurance, strangely enough — though it’s not sexy, I suppose — it pervades our society and is the bedrock upon which we build so many of our activities by trying to quantify and control our risks. So we’re here on a Regulatory Transparency Project podcast talking about insurance because, of course, it is one of the most highly regulated industries in the country, but the way in which it is regulated is quite unique. It is, of course, regulated at the state level. It is also a really mature industry, both in terms of its product offerings and in terms of its regulatory apparatus.
It has been pretty much unchanged since the mid-’40s when the current state of affairs came into being, but we are seeing discrete parts of insurance law and insurance regulation be reexamined in a really meaningful way. So, a couple of years back, you had the transportation network companies, like Uber and Lyft. They came onto the scene and they presented some really novel issues around insurance in terms of what’s the appropriate product as people use their personal vehicles for these commercial purposes? Is it to have a full-on commercial policy? Well, no. That’s quite expensive. And so working through some of those issues really brought to the fore the need for greater flexibility within the insurance regulatory landscape.
Likewise, one of our favorite topics at RTP, self-driving cars, highly automated vehicles, they present entirely new challenges around assessing the risks of drivers as people start to drive less. Similarly, telematics, in terms of tracking our activity via our phone or a plug-in in our vehicle, can give better insights that will allow insurers to rate things in a way that better reflects our behavior, and so our premiums could go down as a result of that as the pricing mechanisms get more specific.
Anyway, Jack, this is just a long way of saying technology and insurance regulation are inextricably intertwined and are evolving together because, as technologies evolve, as our lives evolve, so too do the needs of insureds across the country.
Jack Derwin: Right. Yeah, I mean, that’s really interesting. It’s probably not something most people spend a whole lot of time thinking about, but nearly all Americans have insurance of some kind, so it really affects us all.
Ian Adams: Well, in theory, we’re supposed to have insurance as a matter of — at least until the Supreme Court struck down the mandate — but we’re all supposed to have insurance as a matter of law.
Jack Derwin: Right. So you mentioned, there, that insurance is currently regulated at the state level. Can you tell us a little about why that is and some of the history behind insurance regulation?
Ian Adams: Sure. And it really is fascinating. It goes back to 1945 and the passage of the McCarran‐Ferguson Act, where the federal government recognized that states were in a really — a much better position to regulate the production of insurance and, of course, the solvency of insurers. And that state-based approach to insurance regulation has not changed since 1945. As a result, if you’re in the business of insurance, you’re not dealing with a single federal regulator; you are dealing with actually—and this is a head-scratcher, I know—you’re dealing with 52 insurance regulators if you are working across the country because, of course, we’ve got 50 states, D.C., and then Florida has two separate insurance regulators dealing with different parts of the insurance production process. So you’ve got 52 regulators across all of the states.
And there is an overarching body that is an association of insurance commissioners, known as the “National Association of Insurance Commissioners,” the NAIC, and they promulgate model regulatory guidance, model legislation. They do all sorts of work to try to bring some standardization across the country. But, of course, states are free to do what they want, and so you do get all kinds of eccentricities when it comes to insurance regulation across the 50 states.
But, at the end of the day, what is insurance regulation really about? It’s about making sure that people, when they make a claim, they get paid. So that is the number one most important thing that an insurance regulator does in the United States or anywhere else in the world. They ensure that companies remain solvent and, when they are not solvent, that policyholders aren’t left holding the bag, having paid out all that premium. And then, of course, in the production of insurance and the settlement of claims, they prevent discrimination and other unfair sorts of practices.
So that’s how it’s currently structured and what its overall focus is. But, of course, the devil in in the details, and disruption right now is changing the way longstanding laws to attempt to achieve those goals, how those laws are applied and interpreted.
Jack Derwin: Right. It sounds like they’re certainly not making it easy on you with 52 different sets of rules there.
Ian Adams: No, it’s not easy, but it’s actually a pretty good system. But it probably is what’s leading to insurance being a little more resistant to disruption than some other industries. The bar is really high. The regulatory bar is really high to get into it by virtue of the sophistication of the regulatory system.
Jack Derwin: Right. That’s really interesting. So you mentioned disruption, and, earlier on, you alluded to a couple areas like driverless cars. Can you tell us a little bit more about some of the areas involving insurance that are most ripe for disruption and what’s happing there?
Ian Adams: Yeah, absolutely. And I’ll start with one of the ones that goes back to the 19th century. This rule around anti-rebating, it was called, for years existed and prevented agents — or insurance producers, I should say, from providing insureds or would-be insureds with benefits beyond those within the policy. And the concern was that you were going to have insurance producers doing things that would inadvertently endanger the solvency of the company or would otherwise lead to unfair treatment where one client got a better deal or better benefit from that producer.
What in practice it meant, these anti-rebating laws, is insurance production, the sale of insurance, you were not allowed to bundle other sorts of benefits. So you couldn’t, like, get a toaster from your insurance agent if you came in at a certain time of year and wanted to buy a policy. Now, those laws, which made sense when they were passed, they’ve been applied in all kinds of interesting ways more recently. So, as companies have gone online, access to proprietary platforms for consumers to manage benefits and insurance products, those were considered rebates. And so you have this 19th century body of law that was preventing consumers from being able to have these really streamlined and useful online experiences because of these anti-rebating laws. And only as of this year are we starting to see some real reform get under way at the National Association of Insurance Commissioners that will lead to states modifying these laws such that new, combined product offerings are going to be made available to consumers. And that — at the end of the day, I think that’s a good thing. But it’s an example of where you’ve got a very mature industry get caught up in the cobwebs of laws that really need to be updated or just sunset. So that’s a success story.
When I think of one of the big failures in insurance law, I think of California, which, back at the end of the ’80s, passed Proposition 103, which totally overhauled and ossified California’s insurance regulatory system in such a way that the state now does not allow for the use of more sophisticated rating factors when evaluating a driver’s performance. Which is to say — I now live in the District of Columbia; I can plug a device into my car, have that device sync up to my phone, and I can get a discount because I drive in such a way that the company is able to assess my risk in a really granular way. In California, by law, that cannot be changed without a two-thirds vote of both chambers of the legislature. And, in furtherance of that law, I am not allowed to get such discounts because the law is very prescriptive about what are called “rating factors.” So these are the things that the company takes into account as they assess what your rate will be and the premium that you will therefore pay.
That is a really outdated set of laws and, in the nation’s largest state with its most drivers, is costing billions of dollars. California consumers, every year, because of the innovation that is being foregone, are really, really on the outs. And this is actually one of the benefits of the insurance regulatory system being 50-state. It’s that, if you’re in another jurisdiction, you are not subject to these bizarre laws in California that they can’t seem to get away from. But it is a good example of the risk of putting into that really difficult-to-change statutory context rules that make sense at one moment that technology ends up frustrating later on.
I mean, those are the two kind of the flip sides of technology getting out ahead of where the law is and then the law being able to move on, and technology getting out ahead of where the law is and then the law just staying put and consumers losing as a result.
Jack Derwin: Got you. That’s really interesting how different states can be having entirely different outcomes, here, with their different sets of laws.
So, in our era of big data, how should regulators look to balance concerns about privacy with the insurance industry?
Ian Adams: It’s a good question because insurance is, of course, such a data-intensive enterprise. All of your risk analysis involves huge amounts of data for both underwriting and rating purposes. So I think that the interest that regulators and states and the federal government has had around the privacy of consumers in a digital context, it translates directly into conversations about the future of insurance regulation.
And I think there are a couple of things that can be done to balance some of these concerns, the first of which is to really embrace the robust body of law that is sector-specific around the insurance industry. Of course, the insurance industry has largely had its own body of privacy law for decades. To layer on new state-specific standards and potentially a federal standard that may conflict is not going to do any great benefit for consumers, for policyholders. So I would say one of the big things is to maintain that state-based approach to regulation of insurance which has worked in all of the other areas related to solvency and consumer protection and do the same when it comes to digital privacy of consumers and the control of their information.
The other thing is to really think about how laws interact with one another. So, to the extent that a state like California has introduced the California Consumer Privacy Act or the subsequent CPRA, that puts the industry and lots of other industries that have their own sector-specific privacy regulation in a very challenging position to reconcile a much broader law with much narrower constraints that don’t just go away because a new privacy law has been passed. So that’s one of the really good ways to go about doing it, I think, because, to overlook the impact of having multiple layers, it’s not as though they have an additive effect where consumers get more out of it. Rather, it confounds things and just puts them in a worse position as it becomes more and more difficult to undertake the business of insurance.
It’s not a question that’s going away, of course, Jack. This is — privacy is at the very fore of everyone’s mind; it’s going to continue to be. No doubt, standards will evolve. But, to the extent that regulation is necessary, it really should be focused on discrete harms that we’re looking to prevent.
Jack Derwin: Yeah. Those issues certainly are really interesting, and I definitely will be following along to see how it plays out.
In closing, are there any pieces of legislation in states or potential developments that might happen under the Biden administration that our listeners should be on the lookout for?
Ian Adams: Well, as you know, insurance is regulated at the state level. But the Biden administration, at the Treasury Department, is in charge of the Federal Insurance Office. I would imagine that the Federal Insurance Office is going to undertake studies around just what we were discussing earlier about privacy and big data and the impacts that that has on consumers as they avail themselves of new products. I think that is probably what they’ll focus on.
Jack Derwin: Got you. Great. All right. Well, thanks so much for joining me today, Ian. I really enjoyed the discussion. And I think you did a really good job of breaking down a topic that may not make many headlines, but certainly has significant impact on nearly all Americans.
Ian Adams: Thanks so much, Jack.
Jack Derwin: And thank you to our audience for tuning into this episode of RTP’s Explainer Podcast. Please check out our website, regproject.org, to learn more about this issue and a host of other regulatory topics.
Conclusion: On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at www.regproject.org.
This has been a FedSoc audio production.