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Consumerism: a force to be reckoned with?

Most risk managers today realize that they need to be responsible users of the commodity known as commercial insurance. They know it is in their long-term interest to forge partnerships that allow the industry's capitalists to realize a reasonable return on their investment. They also know the industry cannot survive if we view it as a dumping ground for social ills and costs.

Risk managers are not advocates because they are not part of the industry. Risk managers are consumers. One of their key responsibilities to employers is to see that the industry delivers efficient products and services to meet their growing needs. Also, it is important to see that a competitive marketplace exists which rewards suppliers for creativity, innovation and a willingness to step forward and create more efficient markets or ones where none exist. There is, of course, no one single homogeneous consumer group. Every consumer group requires the same degree of advocacy, regulatory protection or financial guarantee protection. That is why RIMS, for one, supports a two-tier system of regulation of the property/casualty insurance industry. RIMS believes that the current system could continue for personal lines and small businesses, and a substantially deregulated system could be adopted for large, sophisticated consumers. The greatest regulatory need is financial solvency. Regulations beyond that become impediments to a free market.

Regulators are in the business to protect the public and the consumer. Unfortunately, they often do not tailor regulation to the type of consumers involved, or in this case, the insurance vehicles under scrutiny. It will become increasingly important in the future to distinguish between insuring arrangements developed between large, sophisticated sellers and buyers and products directed toward the smaller, more vulnerable consumers without purchasing leverage or leaning.

At the moment, the insurance industry is enjoying a short breathing period between major legislative sessions. Proposition 103 and the attorneys' general lawsuits from 1985 to 1988 are just two of the assaults recently initiated by the insurance reform movement. A glimpse of what the future will be like---when insurance once again becomes a prominent political issue-was recently offered by New Jersey. The televised political advertisements indicated that insurance, principally automobile insurance, was the second most prominent election issue after abortion, The New Jersey rhetoric and dialogue was particularly inflamed and emotional.

Unless the insurance industry is willing and capable of removing some of the hostility from the debate, the future will be more volatile and Stormy. The insurance industry has a formidable obstacle--its image. Some of the bad image can be attributed to the fact that insurance industry bashing is always good for a few votes or headlines. But the last availability crisis forged a new low in public relations. If the industry allows the crisis to repeat, its leaders better take a crash course in how to run public utility firms, because that is what insurance will become.

Yet the state of the property/casualty industry's image did not evolve overnight. It is a result of decades of misunderstanding about insurance and how it operates. Some of it was deliberately brought on by the industry's attempt to cloak itself with arcane processes, practices and rate-making mechanisms. Other confusion genuinely results from the complex nature of the business. It is not an easy task to make insurance simple, but it can be done. Other industries and businesses have had to find ways to do it. No one is, or should be, exempt from consumer relations. No industry is Powerful enough to win a war against its own CUStomers.

Little Understanding

The insurance industry has become a subject of national public policy debate. Many of the industry's leaders have failed to understand this and still refuse to accept it. At any rate, there is no shared institutional understanding of what it takes to be successful at the national policy level. Likewise, there are no successful industry leaders who can carry a simple, believable message to consumers solo. The bottom line is that it is time for change in the philosophy of the insurance industry leadership.

In a broad sense, consumerism has a growing voice and political clout--not just in the insurance industry. Those who choose to fight this growing movement or ignore it will be the casualties among the business community.

RIMS, as an organization, is very uncomfortable with some of the elements of the movement in the insurance field. For example, RIMS views Proposition 103 as a real indictment of the legislative process in California. It represents a failure to reach consensus. There is massive gridlock between the legal profession, the insurance industry, tort reformers and consumers. So a very complex issue is tossed to the voters, along with millions of dollars of emotionally packed rhetoric. Can the voters really make reasonable decisions?

RIMS is opposed to the use of legislative initiatives for complex insurance issues. Voters act emotionally and seek quick fixes. Of all the initiatives on the California ballot, the one that passed did not deal with the underlying causes of high insurance costs. Not one thing was done about high legal expenses, medical cost inflation, auto repair cost increases, automobile thefts, the drunks on our nation's highways or the tremendous inefficiencies in our legal system. The vote cast was really a reflection of the electorate's lack of confidence in the industry and voting in the best interest of their own pocketbooks. It was not a referendum on the merits of the issues. Therein lies the communications challenge before the insurance industry.

Yet, specifically, the problem with Proposition 103 and its clones is that much of the focus has been on rate rollbacks and rate controls. Proposition 103 disregards the cardinal rule that pricing must be based on sound underwriting practices, and replaces underwriting principles with regulators' judgment.

Thus, the rollback conveniently ignores many of the causes of increased premiums. RIMS has long spoken out on the unacceptable volatility in commercial insurance rates. But there has never been proof that insurers are making unreasonable profits at our expense.

While many consumerists are critical of industry reserving practices and other accounting trickery, RIMS focuses its concern on reserve inadequacy. The one thing to be learned through self-insurance, captive insurance and risk-sharing pools is that reserve setters are eternal optimists. With the passage of time, the news only gets worse. Proposition 103 does not seriously address the issues of insurance availability and affordability. It chooses to ignore the fact that eventually consumers are faced with paying the underlying costs.

In conclusion, unlike many consumerists, I am a free market advocate; I do not think more government is the solution for high insurance costs. A profit-motivated private insurance sector can and will respond much more efficiently than governmental programs. My opinion is formed from years of compulsory experience with governmental attempts to pool risks and share costs. Ohio's monopolistic workers' compensation insurance fund is a prime example. I have watched the deficits soar and good risks subsidize bad risks.

It is time to get together and solve these problems while our free-market mechanisms are still intact. The time for isolationist philosophies and combative tactics by the insurance industry are over. Yet on the other hand, we consumers of insurance must put away our hidden agendas, negotiate in good faith and build a base of understanding. Trivializing and politicizing produce short-term gains but also ensure major long-term market chaos. The 1990s should be a period of consensus building.
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Author:Heydinger, Richard C.
Publication:Risk Management
Article Type:column
Date:Feb 1, 1990
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