What Multiple Failures Are Telling Us

Insurance Commissioner Chuck Quackenbush’s forced resignation was the well-earned result of a self-serving response to the massive dislocation of the Northridge earthquake, but it is by no means the first failure of California’s post-Proposition 103 politicized insurance regulatory scheme.

Former Commissioner Roxani Gillespie sought to placate both insurers and consumer advocates with a New Deal-style regime that kept auto insurance rates artificially high for a decade after 103’s passage in 1988 and ignored the public mandate that ZIP Codes play a lesser role in rating differences.

Her successor, John Garamendi, staged photo opportunities with blow-ups of insurance company roll-back checks while at the same time allowing generous (though less publicized) rate increases. And Quackenbush’s department actually counseled auto insurers on how to avoid Proposition 103.

Yet the most-touted solution--returning the job to an appointive one--won’t likely end, at least by itself, the problems Quackenbush’s seedy conduct highlights. As Proposition 103 author Harvey Rosenfield has argued, the fact that Quackenbush’s job is a political one probably brought his transgressions to light sooner than otherwise would have been the case.

There have been some very good appointed commissioners: Bruce Bunner, appointed and then deposed by Gov. George Deukmejian because of Bunner’s willingness to address the issues that led to Proposition 103, comes to mind. Other states, however, have filled the job with stolid industry advocates and, very occasionally, academics such as Pennsylvania’s Herbert Dennenberg or Massachusetts’ James Stone, who lacked the industry know-how to either self-criticize or implement their ideas.

Assuming the job is held by someone honest, the problem with the insurance commissioner’s post is therefore probably more substantive than procedural. Insurance is the only major industry regulated almost entirely by the states. California, the world’s largest insurance market, has given its commissioner broad powers to regulate that market as he or she sees fit. Whether any officeholder can muster the wisdom to wield all the potential power at his or her disposal is dubious. So, above all, what the job requires is modesty about what the insurance commissioner can do alone.

Beginning with Massachusetts Sen. Edward M. Kennedy’s airline deregulation initiative in the late 1970s, we have recognized the self-regulating virtues of market forces in every area of our economic life. Yet California, despite Proposition 103’s expressed goal of a more competitive insurance marketplace, is today stuck with insurance price regulation worthy of the Cold War government of Albania.

Likewise, the insurance commissioner has virtually unmonitored power over financially impaired insurance companies. But with the benefit of hindsight, our Department of Insurance was taken to the cleaners by the consortium of French financiers and Wall Street investment bankers who, in 1992, manipulated the Executive Life Insurance Co. insolvency to their own advantage. Policyholders, shareholders and state guaranty funds lost billions of dollars in value because of it. Each would have been better off had Garamendi stopped short of his crowd-pleasing takeover.

Quackenbush has even had his own foreign policy, turning a valid goal--justice to Holocaust victims denied life insurance benefits because the Nazis rarely issued death certificates--into a politicized effort to earn points with the often Democratic Jewish constituency. He disrupted the careful international effort to extract from recalcitrant European insurers what is due.

Freeing up resources diverted to such dubious ventures would have allowed the department to focus on its core functions: monitoring, but not administering, insurance company finances; enforcing the Legislature’s policies and not making up its own; and assuring that insurance companies play fair with their policyholders.

That means Northridge earthquake victims would have had the Insurance Department’s help in getting their legitimate claims paid promptly. And it also means that insurers would have had an adjudicated public record from which they could argue that most such claims have been handled fairly.

Elected or appointed, the insurance commissioner must be accountable. If only Quackenbush had recognized that, we would not be dealing today with the perhaps criminal diversion of earthquake claim penalties to a children’s football camp.