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December 7, 2016

Time to End the Market for Ignorance

Summary:

Insurance is sold on the basis of ignorance, not information. Innovators can change that dynamic -- but regulators may need to step in.

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Insurance is mostly sold on the basis of ignorance, not information. Innovative insurers have an opportunity to change that dynamic.

Recently, I bought a small television for my bedroom. At $229 for a modest luxury, the purchase was not a life-changing event, and though I’m not entirely happy (the sound is a little tinny) the consequences of the disappointment are minor.

I was able to make a wiser buying decision about that TV than about my homeowners insurance, which cost much more and for which the consequences of a bad decision could be catastrophic, if I had a major loss and bought the wrong coverage from an unreliable company. My lack of knowledge about my homeowners insurance is because insurers market ignorance — presenting a major opportunity for innovative insurers to devise systems that enable consumers to make better buying decisions.

Three factors entered into my TV buying decision: product features, price and quality. 32-inch or 40-inch screen? 1080p or 720p? Smart TV or traditional? For each of those features, how much would I have to pay? And how reliable was the TV likely to be: Samsung vs. Sony vs. LG? Online and brick-and-mortar retailers gave me all the relevant information about product and price, and Consumer Reports and other review sites told me a lot about quality.

See also: Innovation — or Just Innovative Thinking?  

Now think about buying homeowners insurance. Few if any legacy insurers provide a sample policy — the full description of product features — prior to purchase. Some will provide a summary, but the summaries tend to be sketchy at best and don’t provide an adequate basis for comparing policies between insurers. Information about company quality is mostly provided by the warm and fuzzy feeling generated by television commercials; what empirical data exist — Consumer Reports again and state insurance department consumer complaint data — is of limited value.

There are many reasons why insurers don’t provide adequate product or quality information, but the important questions are whether insurers, particularly innovative insurers, will change this situation and, if they don’t, what else can be done in response?

Some innovative insurers and intermediaries are making inroads. Lemonade, for example, promises a summary of coverage and sample policy after a customer applies but before he or she pays, and it gives some information on loss ratios, though, as a start-up, of course it has no claims history so far. Getmargo.com offers an insurance advocate to explain policy terms, something good agents always have done but something that has declined with disintermediation. If those efforts demonstrate a market for information, other companies may follow suit.

But those efforts just scratch the surface. As long as personal lines insurance markets are dominated by ignorance rather than information, there needs to be another type of response that does not depend on the market: better regulation.

That’s one part of the Essential Protections for Policyholders, a project of the Rutgers Center for Risk and Responsibility in cooperation with United Policyholders. For example, the Affordable Care Act requires a summary of benefits and coverage answering questions such as “What is the overall deductible?” and “Do I need a referral to see a specialist?” The same kind of form could be required for homeowners insurance and published on state insurance department websites.

At the other end of the process, most states collect claims data — the proportion of claims closed without payment, the median time to payment of a claim, and so on. Those figures also could be made publicly available as a tool for comparing the reliability of different companies.

See also: The Future of Insurance Is Insurtech  

Insurance is a market commodity, but there are significant failures in the market for insurance information. Innovative insurers have an opportunity here, but until they act, better non-market solutions through regulation are needed.

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About the Author

Jay Feinman is a distinguished professor of law and co-director of the Rutgers Center for Risk and Responsibility at Rutgers Law School. He heads the Essential Protections for Policyholders project and is the author of Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It.

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