Insurance and the Government: Partners in America

Voluntaryist, The, Third Quarter 2004 by Fuller, Kurt

[Editor's Note: The author of this article has been professionally involved in the insurance business for over 27 years. In August 1996, he founded and became president and CEO of the Michigan Insurance Company of Grand Rapids, MI, which currently has over $73 million of premium writings. Mr. Fuller earneu a B.B.A from the University of Iowa, an M.B.A. from the University of Michigan, and the CPCU (Chartered Property and Casualty Underwriter) designation. He has published two previous pieces in THE VOLUNTARYIST (in Whole Nos. 114 and 115).]

Insurance is an enormously large industry in the United States. In exchange for a monetary payment (the premium), one party (the insurer) will assume some of the risk faced by another party (the insured). Virtually any type of risk can be insured, such as losses relating to your death, your car, your house, your teeth, a satellite, Tiger Woods, the Mona Lisa, and a hole-in-one charity event. While some people are repulsed by the thought of purchasing insurance, the reality is that our lives and lifestyles would be very different without it.

If insurance did not exist, it would be immensely more difficult to get a mortgage to purchase a house, or a loan to buy a car. Most lenders would not want to take the risk of their collateral disappearing and be left "holding the bag." It doesn't mean that houses and cars would not exist, it simply means that there would be far fewer of them. It doesn't mean that we wouldn't have teeth; they just would not be as well cared for. It doesn't mean that we wouldn't have beautiful, rare paintings, but there would be fewer of them, and they might not be displayed as frequently in public.

If insurance is such an integral part of our lives, then why is it not embraced by the public as a godsend, and why are premiums not paid enthusiastically? Why does the public demand that government regulate the insurance industry so that the consumer is protected? Why do consumers generally feel that they are being ripped off by the insurance industry, despite the heavy regulation? Why are the insurance carriers perceived as always trying to worm their way out of paying when something goes wrong; why do rates increase, even when you have a good claims record?

The answers to these and most other questions regarding the workings of the insurance business are hidden behind a facade. To the naked eye, the government and the insurance industry are in constant battle, with the government tirelessly working to protect the consumer, and the industry tirelessly working to fleece the consumer (its customers). Behind the facade is a fascinating partnership between the government and insurance companies.

What? How can these "mortal enemies" be partners? How can the government be partners with the evil perpetrators of public misery? And how can insurance companies be partners with the entity that is suppressing its revenues, working to expand the scope of its claims payments, and increasing expenses through compliance with the bureaucracy? This must be a misprint.

Sadly, it is not a misprint. In actuality, the partnership works very well, and allows both partners to flourish. How does it do this? Let's first look at the history of the partnership and see how we got where we are today.

The insurance business in the United States was marked by instability during much of the 19th Century. Companies were generally undercapitalized and ratemaking was mostly guesswork (because there was no historical loss data). The result was that the majority of companies went bankrupt, and many customers were left with large, unpaid claims.1 It is not hard to imagine that customers who suffered large losses (such as a house burning down) believed the government should step in and "do something" about this problem. At the same time, the surviving insurance companies were only too willing to accept "help" from the government in keeping their businesses solvent, in the name of protecting the consumer.2 This was the beginning of the insurance/government partnership.

The stated reasons for government involvement in the insurance business have not changed much since then. A recent article in the FLORIDA STATE UNIVERSITY LAW REVIEW, entitled "Insurance Regulation in the United States," stated that:

Regulation of the insurance industry is necessary. As the United States Supreme Court has long recognized, insurance is a business coupled with a public interest. Consumers invest substantial sums in insurance coverage in advance, but the value of the insurance lies in the future performance of the various contingent obligations. Because the interests protected are so important-including an individual's future ability to provide for dependents in case of death or injury, to retire, to obtain necessary medical treatment, to replace damaged or destroyed property-regulation of the industry furthers public welfare.

Related reasons for regulation center on the complexity of insurance, and consumers' inability to obtain and understand information about insurance. Consumers are ill-equipped to assess a company's future solvency, to compare the coverage of various policies, or to evaluate a company's claims service. Theoretically, government regulation of insurance eliminates these problems. Regulation can ensure solvency and the insurer's ability to pay claims in the future, standardize policy coverage, require minimum coverage, and require fair claims processing.