The complexity of insurance contracts places the average consumer at a disadvantage in the marketplace. This is especially evident in homeowners and automobile insurance.
Before buying an insurance product, consumers need clear, comprehensive disclosures to understand its scope, nature, and cost. These disclosures should be easy to compare so consumers can evaluate policy benefits across providers (see also Private Long-Term Care Insurance).
Experience from recent natural disasters shows that many policyholders who expected their residential policy to cover most of the damage to their homes regardless of cause were unpleasantly surprised to find out what was actually covered. The need to buy separate policies for various hazards (flood, wind, and others), and deal with separate adjusters after an incident, was cumbersome and inefficient. The National Association of Insurance Commissioners has proposed the development of all-perils coverage backed by the National Flood Insurance Program.
Auto insurance is essential for everyone who owns a car. Some policies, however, drastically raise premiums or drop coverage once policyholders reach a certain age, regardless of driving record. In addition, auto insurance rates may reflect factors beyond driving behavior in ways that increase premiums for certain groups. For example, unless prohibited by state law, an insurer may take into account the policyholder’s marital status, income, education, gender, or credit score based on correlations between these factors and supposed risk. The use of credit scores has been defended on the theory that drivers with higher credit scores are less likely to file excessive or frivolous claims.
Individual states approach auto insurance liability differently, offering a no-fault system, a tort-based system, or variations between the two. A number of states have put in place no-fault systems. The insurance policy covers personal injury costs regardless of who was at fault. This is in contrast to states with so-called tort-based policies, which require policyholders to go to court to recover claims if there is a dispute over who is at fault. No-fault policies provide faster, more efficient processing of claims. They often are coupled with restrictions on excessive litigation in order to reduce costs to policyholders. Tort states often offer less coverage but with more affordable premiums. It can be difficult to find automobile insurance that is affordable, has some flexibility in coverage amounts, and is offered on fair, nondiscriminatory terms.
Another area where insurance coverage issues have arisen relates to natural disasters. Natural disasters and climate change have put major strains on the country’s property insurance. In turn, major shortcomings have been revealed. Households with low incomes and retirees living on fixed incomes are hit particularly hard. Insurance is difficult to find and expensive for those living in high-risk areas. Moreover, some homeowners’ insurance policies do not require payment for losses from two events happening at the same time. This has allowed insurers to deny coverage altogether if a small portion of damage can be attributed to a cause other than the one that is covered.
Some companies have enforced stricter underwriting standards to limit their exposure in high-risk areas. Others have limited the types of properties they insure. Some insurers have been forced to leave certain markets altogether.
States have taken a number of actions to improve the availability and affordability of insurance in coastal areas, which are particularly at risk for weather-related damage. Some, such as Florida, have created government reinsurance programs that make it more manageable for private insurers to cover losses, thereby making adequate coverage more affordable. Many have created state catastrophe funds to provide additional insurance capacity by allowing private insurance companies to set aside money tax-free for covered losses. In addition, many have set up state-run wind pools as insurers-of-last-resort.
States have also taken steps to make buildings better able to withstand the impact of major storms by:
- adopting and enforcing risk-based building codes and strengthening land-use planning;
- providing home inspections to identify potential storm-resistance improvements;
- implementing programs to reinforce existing structures, including financial assistance for owners with low incomes; and
- mandating premium discounts for homeowners who implement approved mitigation measures.
Consumers and businesses may be unable to obtain liability insurance or face prohibitively high costs to stay insured due to a variety of risk factors around a vehicle, property, business, or other asset.
Insurance in the sharing economy: Sharing economy companies use online platforms to connect people wanting to exchange goods or services with people who need them (see also Innovation for All). Challenges can arise when a customer is harmed and the individual providing the good or service does not have adequate insurance.
Volunteer driver programs: Some people who volunteer with nonprofit, community-based volunteer driver programs have reported difficulty in obtaining auto insurance coverage for their volunteer duties. Insurance agents sometimes confuse them with drivers for transportation network companies (TNCs), also known as ride-hailing services. TNC drivers use their personal vehicles to provide rides for hire. Personal auto insurance policies generally do not cover TNC driving because they are commercial in nature. Volunteer drivers in these programs are not offering TNC services, though they may be reimbursed for mileage. Passengers sometimes pay modest fees to the nonprofit organization sponsoring the program, which help offset the cost of offering the program. But these fees do not go to the volunteer driver. In some cases, insurance company policies and call center practices may mistakenly increase premiums or deny coverage to volunteer drivers by applying the insurance requirements demanded of TNC drivers (for more information on volunteer driver programs, see Community Transportation Options for Underserved Populations).
Telematics Programs: These apps or devices installed in cars collect data on driving habits. Many insurance companies are encouraging customers to install these devices with the promise of premium discounts for safe drivers. The savings can be substantial for safe drivers—upward of 30 percent savings with some insurance companies. The insurance industry claims that telematics device use improves driving safety. To date, millions of U.S. drivers have agreed to use telematics tracking devices or apps.
Insurance telematics programs also bring potential consumer protection concerns and thus need regulatory oversight and enforcement. The collection of sensitive personal information, including location, could put the consumer at risk if privacy and security protections are not put in place (see also Consumer Data Issues). Data could be used for reasons unrelated to safety such as marketing. Data could also be shared with or sold to an affiliate or third party. Moreover, insurance telematics programs have been found to penalize nighttime driving. This could increase premiums for night shift workers and others who must drive at night These drivers are disproportionately Black, Hispanic/Latino, and low income.
INSURANCE POLICY TERMS: Policy
INSURANCE POLICY TERMS: Policy
Availability of coverage
Policymakers should require fair terms and conditions in insurance to ensure availability and coverage. In particular, age alone should not be used to limit coverage. Insurance companies should be prohibited from:
- denying access to insurance coverage provided in the policy,
- refusing to insure people,
- canceling or failing to renew policies,
- unfairly raising premiums,
- reducing death benefits, or
- unfairly limiting coverage. Older adults, people with disabilities, and people with preexisting and chronic illnesses should be able to obtain insurance with fair pricing and terms.
Insurers should be prohibited from raising costs unfairly or severely limiting service in neighborhoods with certain racial or ethnic makeups.
Insurance companies should be encouraged to improve benefits and coverage for mental illness treated by a licensed mental health practitioner (see also Mental Health).
Fair pricing for all
States should require insurance companies to make their products available at fair and reasonable rates, including to people with disabilities, preexisting conditions, or chronic illnesses.
Policymakers should prohibit the use of credit reports and scores to underwrite insurance. Insurance companies should clearly disclose to consumers the factors that are used to determine rates, including credit scores. Nondriving factors not related to risk should not be used to underwrite insurance.
Disclosures and transparency
Insurance companies should be required to provide clear, informative outlines of coverage before customers buy policies. They should reduce the complexity of consumer decision-making. This includes offering all-perils homeowners’ insurance policies. In particular, companies must be required to disclose the limitations and exclusions in their individual and group health plans and auto and homeowners policies fully.
State insurance departments and insurance companies should be required to provide objective, usable, and comparative consumer information on costs and coverage. They also should provide post-sale disclosure of paid-up life insurance options.
States should develop standard disclosures for the sale of limited-benefit plans, including dreaded disease insurance. While these plans may cover the high costs of serious illness, they only pay out under certain conditions and do not substitute for comprehensive health insurance. These disclosures should explain clearly the terms, including portability, before the sale.
Consumers should be able to have their questions about insurance options answered easily and clearly. They should also understand insurance-related complaint procedures. Education and awareness should include a focus on issues such as the need for loss control and risk management in the liability area. Loss control measures, such as automobile insurers encouraging safe driving classes or property insurers requiring fire suppression systems, reduce the risks that consumers and businesses face and may also thereby reduce premiums. This policy applies to individual consumers as well as organizations, agencies, and small businesses.
States should establish and publicize government- or industry-funded hotlines that would answer consumers’ insurance questions.
Long-term care insurance providers should disclose covered benefits and related terms and conditions, including eligibility, renewability, preexisting conditions, nonduplication of coverage provisions, coverage of dependents, termination, continuation or conversion, limitations, exceptions, reductions, and elimination periods. These should be disclosed fully and understandably.
Insurers should disclose whether a policy provides coverage for less-than-skilled-nursing home care and the extent of home- and community-based care benefits.
The state insurance commissioner should also require insurers to include specific information on long-term care benefits under public and private insurance programs.
Policymakers should require insurance claims to be processed quickly and accurately. They should put in place high claims processing standards applicable to all commercial and subscriber insurance service organizations.
Policyholders should be compensated reasonably and in a timely manner for claims resulting from auto accidents. Auto insurance should provide adequate coverage at a reasonable cost.
Insurance companies should not be allowed to cancel auto insurance policies or raise rates based on age alone. Failing to renew is a form of cancellation.
States should avoid enacting a “choice” automobile insurance law (which allows consumers to choose between no-fault coverage and traditional liability coverage) that would lower benefits or result in insufficient protection.
States should support reduced automobile liability insurance rates for drivers upon successful completion of state-approved driver-improvement courses.
Insurance for natural disasters
Policymakers should ensure the availability and affordability of insurance coverage for natural disasters. Renters and homeowners should carry adequate insurance to protect them against losses from natural disasters.
Policymakers should consider creating programs to ensure coverage in such events. These include:
- government insurance and reinsurance programs that are accurately and fairly priced, particularly when private insurers and reinsurers are charging excessively high rates; and
- catastrophe funds.
States should ensure fair claims handling by requiring insurers to itemize outstanding claims and requiring insurance departments to monitor progress toward their resolution.
State and local governments should adopt and uniformly enforce strong, risk-based building codes, land-use planning, and programs designed to reinforce existing structures. Programs can include home inspections and financial assistance for owners and purchasers who have low or fixed incomes.
States should mandate and publicize insurance premium discounts for people who implement approved mitigation measures.
States should develop and implement storm-resistance labeling programs to encourage market demand for homes meeting higher construction standards.
State housing and housing credit programs should encourage the purchase of homes that meet stringent code standards, particularly in high-risk areas.
States should explore new options to guarantee the availability of liability insurance to those who need it.
States should consider expanding insurance to create new forms of risk-sharing, such as market assistance plans and joint underwriting associations. If these prove insufficient, states should establish mandatory risk-sharing or assigned-risk programs. These alternatives must be regulated as carefully as regular insurance companies are in order to protect policyholders.
Regulators should allow liability policies to be canceled before the expiration date only when there is good cause, such as failure to pay premiums, and after reasonable notice is provided. Refusals to renew should require a written explanation and a reasonable notice period. There must be protections against nonrenewals for certain types of insurance, such as medical malpractice.
Insurance coverage in the sharing economy
State and local governments should require sharing economy companies to ensure that providers have appropriate and adequate insurance coverage to protect both providers and consumers (see also Innovation for All policy).
Insurance coverage for volunteer drivers
Policymakers should protect the insurability of volunteer drivers who otherwise maintain a consistent risk profile. Policymakers should prohibit insurance companies from denying or canceling insurance, imposing a surcharge, or increasing rates solely on the basis of serving as a volunteer driver.
Personal auto insurance policies should make clear that they cover volunteer driving. This includes increased training for employees.
Nonprofit volunteer driver service providers should buy excess liability coverage for volunteer drivers to ensure adequate coverage.
Personal insurance policies should:
- explicitly state that volunteer driving is covered,
- include model language from the Insurance Service Office stating that the policy exclusion for transportation network companies does not apply when the vehicle is being used for volunteer or charitable purposes, and
- clearly state that for-hire/livery status applies only to commercial for-profit service and not to volunteer drivers. This should be the case even when volunteer drivers receive mileage reimbursement or when their passengers are charged a fare or other fee to offset the cost of running the not-for-profit.
Telematics programs that collect consumer-generated driving data should improve driver safety and integrate consumer protections. Consumers should provide affirmative consent to participate. Programs run by insurance companies should lower costs for safe drivers.
State insurance departments should establish rules and conduct oversight and enforcement regarding use of telematics. These rules should address fairness, pricing, transparency, and consumer privacy and security issues (see also Consumer Data Issues).