Consumer Backlash : Insurance Industry’s Clout Cracks

The effects so far of Proposition 103 have proved at least one thing: It’s hard to escape the reach of the insurance industry.

You need insurance when you buy a house or a car, start a business or seek to protect your family against financial ruin. The typical family spends more on insurance premiums than any item except food and housing.

With hundreds of billions of dollars flowing into insurance company coffers, the industry has become one of the most powerful in the world--yet one so little understood, so opaque, that its members have been described as “invisible bankers.” Life insurers are the nation’s largest provider of mortgages for commercial real estate while property-casualty firms are among the largest owners of municipal bonds, financing hundreds of projects ranging from highways to hospitals.

Enormous Influence

And its political contributions have brought enormous influence at every level of government, with notable victories: The Federal Trade Commission is prohibited by law from initiating its own study of the industry, and insurers have antitrust exemptions unavailable to most other businesses.

But as California’s passage of Proposition 103 illustrates, insurers now face an unprecedented consumer-led backlash that threatens to crack their largely chink-free armor and transform the way insurance is regulated, priced and sold.

The industry’s strategy of splintering regulation among 50 separate states--where it has wielded remarkable political influence--is beginning to weaken. More members of Congress and state legislatures are determined to increase or change insurance regulation, while voters--angry over double-digit hikes in auto insurance bills--are exploring reform through the referendum process.

Public Gains Power

“It’s pretty clear that people all over the country are fed up with the excesses of the insurance industry,” said Rep. Don Edwards (D-San Jose), who this year sponsored an unsuccessful House bill to repeal the industry’s antitrust exemption. “For the first time, the pressure of the public is more powerful than the pressure of the insurance industry. That’s going to give legislators courage.”

Consumer advocates such as J. Robert Hunter, president of the National Insurance Consumer Organization, already are working to put Proposition 103-like measures before voters in some of 16 other states that also use the initiative process. Since the passage of Proposition 103, Hunter said, his office has received inquiries from consumer groups in Washington, Oregon, Maryland and Florida about possibly launching initiatives.

Insurance reform will become the top priority of the consumer movement in the coming year, especially at the state and local level, said Stephen Brobeck, executive director of Consumer Federation of America. He noted that consumer groups expect to work jointly with industry trade groups on reform.

“You can expect reform efforts in those states with high auto insurance premiums,” Brobeck said, naming Massachusetts, New Jersey and Pennsylvania.

To be sure, much of the consumers’ ire is also directed at state legislators for failing to initiate effective reforms. And insurance industry officials admit that they must accept some responsibility for allowing consumer resentment to get so intense, to the point where solutions desirable to the industry have become overwhelmed by more extreme measures such as Proposition 103.

‘Dropped the Ball’

“Legislatures and industry have dropped the ball to get people to understand” the complexity of the problem, said John J. Martin, president of the personal insurance division of Aetna Life & Casualty.

Industry officials now say they are willing to seek compromises with consumer groups to jointly attack the root causes of rising insurance rates--increasing medical, legal and repair bills, among others. Even while they strongly object to Proposition 103 as unconstitutional and not attacking the real problems of high rates, industry representatives say they cannot ignore the consumer resentment that led to its passage.

“We do have to respond because of consumer dissatisfaction of the scope revealed in California,” said Sean Mooney, senior vice president and economist at the Insurance Information Institute, the industry’ public relations arm.

“Proposition 103 will speed up the process of research and searching for alternate solutions,” said Pete Ingham, general counsel for State Farm Mutual Automobile Insurance Co., California’s largest auto insurer.

Low Public Esteem

Contending with an angrier public and emboldened legislators would be a big change for an industry that pretty much has had its own way--despite the fact that insurance salespeople consistently rank among the least popular professionals in public opinion polls. A Gallup Poll released this week showed that Americans rank insurance salespeople near the bottom in honesty and ethical standards, above only advertising practitioners and car salesmen.

The sheer size and scope of the industry is a key source of its political clout.

A typical family spends about $15 of every $100 in disposable income on all types of insurance, consumer advocate Hunter said.

Yet few consumers understand insurance. “Its products are so complicated that they are difficult if not impossible to comparison-shop by consumers,” said Brobeck of the Consumer Federation.

Drawing from profits, premiums available for investment and other funds, the industry controls a staggering $1.4 trillion in assets, according to A. M. Best & Co., which tracks the financial strength of insurance companies. That includes $650 billion in bonds and $210 billion in mortgage loans for commercial real estate.

Financing for High-Rises

“If it weren’t for the insurance industry, you wouldn’t see the skyscrapers in L.A.,” said Richard Hall, editor of Best’s Insurance Management Reports.

Virtually all downtown Los Angeles buildings at one point had life insurance industry financing or ownership, including the First Interstate tower and Wells Fargo Center, said Harry J. Kelly, president of the commercial mortgage banking unit of Coldwell Banker, a Los Angeles real estate firm.

Insurance companies also have become major players in the securities business by acquiring brokerage firms in recent years. Prudential Insurance, for example, owns Prudential-Bache Securities. Kemper Financial Cos. owns several regional brokerages, including Bateman Eichler, Hill Richards in Los Angeles.

Premiums for property-casualty insurance--the type that protects homes, autos and businesses--rose to $202.7 billion at the end of 1987, up from $154.6 billion two years earlier, according to A. M. Best. In California, auto insurance premiums alone have risen about 21% in just two years and have nearly tripled in the last decade, according to industry sources.

Reported profits for property-casualty insurers rose to $10 billion last year from losses of $3.3 billion in 1985, A. M. Best said. Add to that profits from life insurance, and the total reported industry profit hit $16.1 billion last year.

Invariably, some of that income has helped make the industry one of the nation’s most powerful lobbying forces and campaign contributors. Insurance companies and trade groups gave more than $6.4 million in campaign contributions to federal candidates in 1985-86, according to Common Cause, the Washington-based public interest lobby. The industry’s clout has been enhanced by its force of more than 500,000 insurance agents nationwide--the industry altogether employs 2 million--many exerting full-court presses on legislators with calls, letters and telegrams.

“They are more powerful than the right-to-lifers, the National Rifle Assn. and bankers combined,” Rep. Edwards said.

The insurance lobby earlier this year fought successfully to maintain part of federal tax breaks provided for certain life insurance products.

Investigation Prohibited

Legislation was passed in 1980 that prohibits the Federal Trade Commission from investigating the industry, unless specifically ordered by the House or Senate Commerce committees. The industry contends that since the federal government has virtually no jurisdiction over insurance, it should not be allowed to study it.

More importantly, the industry has enjoyed protection from federal antitrust laws since 1869, when the Supreme Court ruled that insurance was not considered interstate commerce and thus was not subject to federal regulation.

The high court overturned that decision in 1944, but Congress promptly responded by enacting the McCarran-Ferguson Act a year later. The act provides insurers with limited exemption from antitrust laws--except in cases of “boycott, intimidation or coercion”--and leaves industry regulation largely up to the states.

Antitrust exemption allows insurers to share actuarial data on accidents and other risks, which they use to set premiums. Insurers argue that this privilege allows them to accurately price premiums.

But consumer advocates and a growing list of regulators and insurance customers say the industry’s antitrust exemption is being abused. Insurers set prices and restrict competition, contends FTC Chairman Daniel Oliver. In congressional testimony earlier this year, Oliver said McCarran-Ferguson “denies consumers the best array of insurance services at the lowest possible cost.”

“The insurance lobby has been able to shield price-fixing from federal antitrust scrutiny not by force of argument but by sheer political muscle,” Sen. Howard M. Metzenbaum (D-Ohio) said at a Senate hearing earlier this year on his unsuccessful bill to repeal McCarran-Ferguson.

Also, critics say, insurers can agree not to compete against each other in certain territories.

By ceding regulation to the states, critics charge, McCarran-Ferguson allows states to pass legislation that can effectively restrict competition. California, for example, is among several states that prohibit insurance agents from offering customers discounts or rebates on premiums--a provision that Proposition 103 repeals.

However, insurance officials and some regulators deny that McCarran-Ferguson is abused. They say there is more than enough competition between insurers, as evidenced by frequent rate wars in certain property-casualty insurance lines.

And McCarran-Ferguson does not prevent states from enacting their own antitrust rules, industry officials say. California’s Insurance Code, in fact, does prohibit price fixing, said Craig Berrington, general counsel for the American Insurance Assn., an industry trade group.

“Companies operate on their own. They don’t agree with each other on price,” Berrington said. “People have a wide variety of companies to choose from in insurance, and generally have a wide variety of prices.”

Hard to Set Premiums

In certain lines, such as medical malpractice insurance, there is less competition, industry officials concede. But that is because no one knows the full risks and thus it is hard to set proper premiums, said John E. Washburn, Illinois state insurance director and president of the National Assn. of Insurance Commissioners, a state regulators’ group.

Even with the companies’ power at the federal level, it is at the state level where insurance regulation is focused--and where industry lobbying is most evident. In California, for example, insurance interests are the single biggest special-interest contributors to candidates for statewide office, according to a study released earlier this year by Consumers Union, publisher of Consumer Reports magazine.

Between 1985 and 1987, property-casualty insurers gave legislators $2.7 million and Gov. George Deukmejian $460,645 in campaign contributions, with only three of 120 members of the Legislature not receiving industry donations, Consumers Union said.

Against a state-by-state industry juggernaut, state insurance departments are inadequate, critics charge. The Consumer Insurance Interest Group and National Assn. of Professional Insurance Agents concluded in a recent study that while state regulation has improved in the last decade, many states still fail to staff their offices fully or maintain pay scales that rival the private sector.

Most states lack adequate computer systems, and less than half examine each insurance company in their state at least once every three years, the report said. Further, salaries of state Insurance Department professionals are far below comparable private industry salaries. States receive an average of 23,000 consumer complaints annually, but only a third of the 44 departments reviewed in the study have written procedures for handling them.

Industry interests agree that states should have more resources to improve regulation. Many industry officials want regulators to be more watchful for companies in possible financial trouble, to prevent insolvencies, particularly among life insurers, that could grow in an economic recession and undermine consumer confidence in the industry.

State regulators, for their part, contend that they are doing a good job, noting that even though some states have relatively small staffs, all state regulators combined total more than 6,000 professionals. Through their organization, the National Assn. of Insurance Commissioners, they share information and computer resources, particularly to monitor large companies that operate in more than one state, association president Washburn said. And while salaries could be better, many highly qualified people desire work in insurance regulation, he said.

Nonetheless, with insurance bills and consumer frustration growing, state legislatures have tried to take matters into their own hands. But attempts by legislatures to force rate rollbacks or other changes--like those mandated under Proposition 103--have often been defeated by the industry. Insurers often have threatened to pull out of those states, creating insurance shortages that in turn forced legislators to back down.

Such was the case in West Virginia, where industry threats to pull out resulted in the Legislature revising a 1986 measure affecting medical malpractice insurance. Several firms, such as Allstate and Fireman’s Fund, have left or plan to leave auto insurance in Massachusetts due to regulations that they deem unacceptable.

But the industry’s clout may be weakening.

Critics Gather Strength

The list of industry critics have grown in recent years, and they are expected to be bolstered by passage of Proposition 103.

Efforts at the federal level to rescind the industry’s antitrust exemption gained strength this last year. The House bill sponsored by California’s Rep. Edwards to repeal McCarran-Ferguson was the first such measure ever to be approved by a congressional subcommittee since the act took effect, Edwards said.

States also are becoming increasingly aggressive. For example, attorneys general of eight states, including California, filed a lawsuit last March against four giant insurers--Allstate, Hartford, Aetna and Cigna--alleging that they conspired with other insurance interests to deny or reduce liability coverage to certain entities, in effect creating a liability insurance shortage in the mid-1980s. Other states have since joined that action, and similar suits have also been filed and consolidated with the original complaint.

States also are increasingly considering providing certain kinds of insurance themselves if private insurers pull out. For example, several states provide their own workers compensation coverage.

The ball is in industry’s court to develop solutions that will reduce auto insurance bills by reducing rising medical, litigation and repair costs, said Berrington of the American Insurance Assn. That includes working for no-fault insurance legislation that would reduce legal bills by limiting lawsuits to cases involving severe injury or death.

“The bottom line is to look for new and innovative ways to get the price of the product down,” said Mooney of the Insurance Information Institute. One possibility, he said, is to require set claims payments for specific injuries, as is done in New York. The industry may also renew its efforts with U.S. auto makers for changes in vehicle construction that could reduce repair costs, he said.

Brobeck and other consumer advocates say the insurance industry has no choice but to push for reform, given the strong consumer backlash. He pointed out the industry’s failure to defeat Proposition 103 and win approval of Proposition 104, an industry-backed initiative to set up a no-fault system--despite $70 million in campaign spending by insurance forces.

“Passage of 103 will encourage dozens of reform efforts,” Brobeck said. “The question now is what form will those campaigns will take.”