Public Policy And The Insurance Industry
From colonial times, when organizing an insurance company required a special legislative charter, to the present the insurance industry has been subject to supervision by some governmental body. In fact, the insurance business is one of the most comprehensively regulated areas of business activity.
Need for Regulation
Any discussion of insurance regulation must first consider the question: why is regulation needed? The underlying reason for insurance regulation, or for that matter the regulation of almost any business enterprise, is that the competitive market regulated by the forces of supply and demand does not result in the availability of the best possible service or product at the lowest or best price. While the markets for many goods and services suffer from imperfections, the characteristics inherent in the insurance product and transaction seem to lead to more serious problems than those usually encountered in other markets.
The first group of problems stems from the nature of the insurance contract. It is complicated and technical, being written and interpreted in a legalistic fashion, and its benefits are intangible. The contract also possesses the previously discussed legal characteristic of adhesion which makes its provisions generally not subject to negotiation. The result of the above factors is that insurance contracts are difficult to evaluate and to compare. The insurance consumer thus becomes a target for unethical practices.
A second set of problems arises from the fact that insurance contracts, especially life contracts, extend for long periods of time during which the insurer is holding the insured’s money. In effect, the insurer is acting as a bank and has a fiduciary responsibility to the insured. Thus, the insured relies on the insurance company in two ways: first, to make good a promise of payment which may be thirty or forty years in the future and, second, to safeguard the monies paid to the company in the form of premiums.
The third set of problems centers on the very serious consequences of the financial collapse of insurers. Because of the large number of persons whose financial security depends on the proceeds of life, health, and accident insurance, the solvency of insurance firms is vitally important. One needs only to picture the plight of a widow who inherits an estate composed of a worthless life insurance contract to realize the importance of the insurer’s financial stability.
Purposes of Regulation
The purposes of insurance regulation are many and varied. They range from the collection of taxes on premiums to the promotion of solvency through control of insurer investments and from the requirements relating to provisions in a health insurance contract to the licensing of insurance agents. However, if all regulatory objectives were distilled, their essence would be to preserve and extend the benefits of insurance. This requires among other things that insurance companies remain solvent, compete with each other, and refrain from dishonest or fraudulent practices. This last requirement cannot be overemphasized in the promotion and sale of life and health insurance. While the life and health insurance industry as a whole has done a commendable job of self regulation, there are numerous instances where insurers and insurance agents have acted in ways adverse to the best interests of the insurance consumer. Thus, the presence of some outside supervisory force is needed. The history and nature of this supervisory force are the topics of the following discussions.