Bound by red tape: Politics and regulatory procedure hinder industry attempts to set fair rates, make insurance prices affordable and handle claims more efficiently. (Property/Casualty: Selling Insight).

The political and regulatory processes--and certainly the marketplace--require insurers to pay claims efficiently, set rates equitably and keep insurance prices affordable. But sometimes it seems that critics who are the first to charge us with failing in this mission are the very ones preventing us from achieving it.

Consider asbestos liability, for example. Insurers have been trying to get legislation passed to reduce claim costs for more than 25 years, but Congress has been unwilling to do anything. Meanwhile, defense costs mount, scores of companies are being forced into bankruptcy by asbestos claims and the number and types of entities with claims against them are rapidly expanding. Claimants who have been exposed to asbestos but are not yet physically impaired rush to file out of fear that if they later develop an illness, the company responsible for exposing them will have no money left. The gravity of the situation is now clear. What is unclear is whether Congress will act on a new plan to conserve funds for the seriously ill while protecting future claimants.

In another area, credit scoring--or more accurately, insurance scoring--is being challenged by lawmakers, despite confirmation by actuarial consultants and insurance department studies of its validity as a predictor of future claims. Everyone would agree that to set insurance rates fairly, insurers need to identify risky drivers. Pure credit scores reflect the likelihood of paying back debt, whereas insurance scores focus on patterns of credit management, which correlate with risk. (See "Giving Credit Its Due," page 37.)

Unfortunately, people generally assume that insurers can obtain all the information they need from state motor vehicle records and that reportable accidents, speeding tickets, convictions for drunken driving and other traffic violations are automatically and--in this age of electronic communication--instantaneously recorded. But in fact, much of that data is missing. A 1990 Insurance Research Council study found that on average only 40% of reportable accidents appeared on motor vehicle records and only 19% of drivers in the study had a conviction related to an accident recorded, even though more than 60% were considered legally at fault. An analysis of current laws shows that the amount of useful information is still very poor, because states often don't require what insurers look for to be recorded or they offer drivers an opportunity to obtain a lesser sentence or to avoid having information noted in the official record. In the absence of this information, insurers have turned to the next best tool: insuran ce scoring.

Some legislators maintain that the use of insurance scores based on credit-management patterns unfairly penalizes some consumers. Insurers maintain that insurance scoring is the most accurate tool they have to set rates equitably. Within the industry, the use of credit information is still evolving. Over the next few years, there may be greater uniformity of practices and, thus, greater public acceptance. For example, according to an Illinois Insurance Department survey, fewer than one-quarter of companies that use insurance scores now re-evaluate credit information periodically to see if a different rate is justified. While it's true that most people's credit record changes slowly, the case for using credit information would be bolstered if re-evaluations were the norm.

A third area where government goals and government actions are inconsistent is auto insurance fraud. Legislators are chronically slow to react to fraud partly because doctors, chiropractors and lawyers lobby fiercely against attempts to circumscribe the activities of even the honest majority. In Florida, where the estimated cost of auto insurance fraud jumped from $100 per policyholder in 1989 to $242 in 1998, it took more than 10 years and a grand jury report to get a major anti-fraud bill enacted. In New Jersey, it took a decade and a half. And in New York, where the average cost of a personal injury claim has risen 70% since 1995, the Legislature is expected to pass a bill with so many loopholes that most crooked medical-care providers will be able to operate as they always have.

The insurance industry obviously has to compete for legislators' attention with other industries that depend on the insurance system for their livelihoods. But we are gaining credibility, in part because our communications are now more open, forceful and focused on the real consequences for consumers. In the end, our most effective argument invokes common sense: that it is in the customer's best interest for insurers to be able to pay claims efficiently, set rates equitably and keep insurance affordable.

Gordon Stewart, a Best's Review columnist, is president of the Insurance Information Institute, New York. He can be reached at [e-mail].