In a recent post I outlined some of the problems with insurance regulation. I'll try to briefly mention some things that I either forgot to say or failed to emphasize without trying too hard to wrap it up in a cohesive narrative. Here are some scattered thoughts.
People really do turn back into human beings once you get them on the phone and talk to them like they're people. Kurt, impolite e-mails and official letters turn into, "Oh, hello! How are you today!" A few boorish oafs (or oafish boors?) do not undergo this reversion to human form, but most do. I think my other post overstated the rudeness and understated this very positive point. People like to think they are nice and usually try to treat others with dignity. Professionals like to think of themselves as having an earned sense of integrity. I'm thinking of Russ Roberts' description of Adam Smith: People like to be respected, but also to have an internal sense that they are actually respectable. We like not just to be loved, but to actually be lovely. In a phone conference with one regulator who I had had previous dealings with in a different role at my company, he remembered me and said, "The last time I spoke to you, you were about to run out of the office because your baby was due any day." One regulator rapped with me on the phone for about 15 minutes after we had closed out our filing. Her professional obligation was done, but she wanted to chat, one colleague to another. Another e-mailed me after I received my designation to congratulate me, long after we'd had any kind of ongoing business-relationship. The world isn't just "incentives" all the way down. People are funny. Most of them are kind of pleasant.
There is a serious "rule-by-checklist" mentality in insurance regulation. So long as someone can check something off their list as "handled" or "answered", they don't really care whether it's 1) completely irrelevant (so long as I get my check!) or 2) technically "answered" but still a problem. I think this is a feature of government, and bureaucracy more generally. A private enterprise can keep changing the rules to avoid rule-gamers and adjust to new trends. A government agency doesn't really face any consequence for having an out-of-date checklist. Governments are also bound by statutory authority; they can't just go banning shit they don't like...usually. Private enterprise, being private, can set the rules within the walls of their own buildings and adjust them as quickly as necessary. If their checklists are out of date, they lose money and lose out to competitors. Government regulation is complying with an out-of-date checklist. Market regulation means trying to ensure your internal checklist is up-to-date.
I don't think my previous post truly captured the banal tedium of the back-and-forth objection-and-response process. Regulators will object to a rate filing. The insurer might respond in full detail, or they may give just enough to barely answer the question and hope that's sufficient. Is the regulator asking this question because they are sophisticated and anticipate a specific "wrong" answer? Or is the regulator clueless and confused? Should we get them on the phone to clarify? Or should we simply fire off a borderline adequate response letter and hope they'll accept? Sometimes we'll be waiting weeks or months for approval, and instead yet another objection letter will show up. Sometimes this happens at inopportune times. Maybe we built in plenty of time for the objection/approval process, but the regulator still dragged their feet. So the objection comes when the actuary who needs to respond to it will be on a week-long vacation, or out studying for an actuarial exam, or (as alluded to above) out caring for a newborn baby and exhausted mother. One state will sit on the filing for two months, then send a 20- or 30-question objection letter. The little icon on Microsoft Outlook that shows you have an unread e-mail? At one point it drove me into a near-fit of anxiety every time I saw it because I thought it was an official correspondence from (say) the State of Florida, arriving just in time to ruin my week. (It took another year to unlearn this anxiety after I had moved out of that role.) It's a little unfair to say they "sit on" our filings. I'm sure they are very busy and don't have the resources to thoroughly review all filings in a timely matter. But knowing this, they should show some professional courtesy and grant us a little lenience. Meanwhile, through this delay, our IT folks are waiting to implement the change, and we have to keep telling them to hold off because we don't have approval. If we have a tight schedule for our IT crew, a delay on one state's rate change can have knock-on effects in which all subsequent rate changes are delayed, until they have time to catch up.
I meant to make an "in their defense..." point in my previous post. Maybe all this regulatory oversight looks stupid if you look at the actual actions taken. But maybe it's actually keeping us honest? The marginal regulatory action looks pretty silly and unnecessary, but the existence of this threat is keeping us from cheating our policyholders. In his book Breaking Rank, former police chief Norm Stamper describes a cop cursing out a "sleazy" defense attorney, who always stands up for the bad guys and sometimes get them off when they're really guilty. The defense attorney responds that, if it weren't for him constantly busting the prosecution's balls, the prosecutors and police would get lazy. They'd slack in their investigations, deny their suspect their constitutional rights more often (given that there wouldn't be anyone pushing back), and put more innocent people in prison. So maybe all this regulation looks silly to me but is acting like a back-stop against the bad stuff we would try in an unconstrained world. I don't quite buy this justification, but it had occurred to me so I wanted to share it. The insurance market is highly competitive. There are hundreds, maybe thousands, of personal lines insurers. Any screw-up we make is an opportunity for a thousand other players to steal our business. But, I don't know, maybe we'd all get lazy and slack, in the exact same way, making the exact same infractions, if not for regulation? I'll just shrug and say "Maybe."
There is an actuarial exam on the history of insurance regulation (well, maybe 30-40% of the syllabus is on this topic). The syllabus for this exam contains several papers that in some way or another outline various regulatory failures. There used to be a paper on failed attempts to constrain rate plans. Michigan, for example, said that you could only have a few rating territories, and furthermore that the difference between rates could only be "this much." This was an attempt to keep premiums low in Detroit. It failed, because some companies could write in Detroit while others wrote in the rest of the state. In fact, the same company could write business in two different charters (separate companies under the same parent company), rendering the regulation irrelevant. There is also a long discussion of "risk-based capital", or RBC. This is a set of rules for discounting various kind of assets and comparing them to the company's liabilities. Perhaps government bonds are worth 100% of their face value, but maybe junk bonds are only worth a fraction of their face value, to account for the fact that they aren't reliable. The punch-line: RBC had almost no power to predict insurer insolvency. I mention this because solvency regulation came up in the comments of the previous post. In theory, I admit this superficially seems like a legitimate case for government regulation. In practice, you need an almost omniscient government to actually spot the insolvent insurers.
If I think of more, I'll do another post.
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