Insurance Mistakes Cost Customers Millions : Regulation: State governments are stepping up their scrutiny of companies’ conduct. The errors cost insurers, too.
Insurers are making mistakes. Lots. And they are costing customers time, grief and millions of dollars in extra premiums, regulators say.
Insurance departments across the United States have quietly been increasing their investigations of companies’ conduct, and the findings are sometimes alarming.
An industry that boasts state-of-the-art technology and high-quality customer service often charges customers too much or too little, cancels policies improperly and violates many other state laws, regulators say.
Regulators believe that most of the errors are unintentional. Some companies undercharge more than they overcharge.
The national total of overcharges is unknown, but regulators believe that it is well into the millions of dollars because they only see problems in random samples. Overcharges to individual consumers range from a few dollars to hundreds and can be larger for businesses.
The problems have surfaced in “market conduct” examinations by insurance departments, which review individual companies to see how they are treating customers.
Some of the best-known companies have been found to overcharge or undercharge one of three or one of four auto insurance customers in some random samplings.
“You wouldn’t believe how common it is,” said Hawley D. Walter, administrator for property-casualty market conduct reviews at the Florida Department of Insurance.
But Henry Katz, the ITT Hartford Insurance Group’s vice president of government relations, said: “Our own experience has shown we’re as much victims of mispricing as consumers are.”
The studies also found that insurers pay too much or too little on certain claims and fail to give customers enough notice of new premiums before policies are renewed.
Insurers admit that they have made errors but say they correct them when notified and still believe that they do a good job of serving customers. An insurer may err frequently in one line of coverage while handling another line with few mistakes, regulators have found.
“We’re a large company, and I think we do a very good job of servicing our business,” said Richard D. Broome, counsel for Aetna Life & Casualty Co. “Examinations are meant to look at the flaws,” he said, adding, “You shouldn’t take the problems they’ve uncovered to mean we don’t do a very good job.”
Companies blame human error, faulty computer programming, the complexity of premium calculations and difficulty in complying with new laws.
“It’s safe to say we find problems with most--not all, but most--companies we review,” said Dennis C. Shoop, chief of market conduct reviews for Pennsylvania’s insurance department.
Pennsylvania just started its market conduct reviews a year ago, one of a growing number of states doing them. Other states are increasing the number of reviews or getting tougher with fines.
“Companies are very sloppy,” said J. Robert Hunter, president of the National Insurance Consumer Organization.
“No wonder they’re getting out of the business,” he said, citing some companies that are dropping auto insurance. “They can’t handle it.”
Hunter said he is not surprised by the frequency of insurers’ errors, attributing them to multiple-level bureaucracies.
“You can be incompetent and have integrity,” Hunter said. “You know what the road to hell is paved with.”
States such as Connecticut and Missouri tolerate errors on about 10% of the policies they examine before they levy fines for mispricing.
Regulators do not know how many consumers are overcharged. In each exam, a state usually looks only at a random sample of policies bought by its own residents.
A company can be ordered to review all policies of a particular line in the state if a widespread problem is believed to exist. Regulators do not always do that because it can be a mammoth, costly task.
Also, regulators have no system to track each company’s errors nationally. All they know is that more states are watching.
About 20 states do formal market conduct reviews; 10 more do some market conduct checks at the same time they are reviewing companies’ financial health, said Dick Rogers, deputy director of the consumer division of the Illinois Department of Insurance.
States still are not doing nearly enough reviews of insurers, consumer advocate Hunter said. A 1988 study of insurance departments found that states had 1,327 insurance companies licensed on average, but each state reviewed an average of 14 companies annually. The study was done by the Consumer Insurance Interest Group and National Assn. of Professional Insurance Agents.
Market conduct reviews, although limited in number, have grown in scope and sophistication. Florida, for instance, which launched market conduct studies in 1972, checks to make sure that a company is using only the rates and policy forms it has filed with the insurance department. Examiners make sure the insurer is following its own underwriting rules in selecting and classifying customers and not red-lining or discriminating in other ways.
In life and health insurance, states such as Missouri target misleading advertising.
“They present the policy in the best light, usually with attendant statistics to scare you into buying it,” said Brad Connor, chief market conduct examiner in Missouri. The department insists that ads must fairly portray a policy without glossing over what it excludes, Connor said.
Some states, including New York, focus on commercial insurance, where mispricing occurs for different reasons. Regulators in New York and Florida believe that insurers often intentionally misuse the leeway they have in pricing coverage for businesses so they can gain a competitive advantage. In business insurance, basic rates are raised or lowered depending on the characteristics of the customer. Good safety measures, for example, mean lower premiums.
But insurers misapply the rates, granting credits where they are not deserved, said Janet E. Glover, assistant bureau chief, property and casualty bureau, at New York’s insurance department.
When they find mispricing or other errors, regulators fine insurers. The fines are seldom more than $100,000 in most states, and usually much less. From September, 1987, through Feb. 9 of this year, Connecticut levied $214,200 in fines on 27 insurers, some owned by the same parent. The fines ranged from $1,000 to $45,500.
Even a $50,000 fine, Hunter joked, is a “corporate lunch” to a major insurer. Such small fines would be more effective if insurance departments were out “blowing the trumpet” about them, Hunter said.
“The only way to effect change is to hit them in the wallet or in the public relations area,” Hunter said.
Regulators believe that’s exactly what they’re doing, and companies admit that they are embarrassed by fines of any size.
A fine “is a measure of our displeasure with them. It gets reported, and it has the effect of embarrassing them,” said Missouri’s Connor. “Our primary goal has been to fix (the problem) and not to make a dramatic fine and ultimately hurt the policyholders.”
Connor said it probably would be impossible to prevent an insurer from counting fines as expenses that are used to figure future rates. Other states say they do prohibit the practice and some companies say they do not recover fines through rates.
Connor said he believes that some companies have decided it costs less to pay a market conduct fine than to correct a problem before regulators detect it. Some companies “went to business school one day too long and concluded a cost-benefit analysis for all your ills is the way to go,” Connor said.
“I see a fine as a deterrent,” said John Farley, chief of Connecticut’s market conduct division. “There have been some huge fines in New York, but I don’t think the impact on a company is any different whether a fine is $50,000 or $300,000. . . . It’s the publicity they don’t like.”
Travelers Corp. agrees. The company, which has annual premiums of $7.8 billion, undergoes reviews in six to eight states each year and pays roughly $100,000 in market conduct fines in a typical year.
“Just the publicity of an examination--we’d prefer not to be tainted as a sloppy operation,” said Richard C. Reeves, secretary, property-casualty regulatory division for Travelers. “We think of ourselves as a quality operation.”
Insurers expect regulators’ scrutiny to continue increasing, and some say they do not mind. “We like to think we’re doing things right, and if we’re not, it calls attention to the things we’re not (correcting) on our own,” Katz said.
