How Regulation Helps The Regulated
posted by Dan Filler
Some people may assume that companies in regulated industries dislike regulation. Or that they only like regulation to the degree that it allows them to artificially inflate prices. Today’s NY Times story about long-term care insurance – and in particular, those insurance companies that actively resist paying out on their policies – shows how soft regulation can damage an entire industry. The Times focuses on Conseco, a company that receives large numbers of complaints about its services. More generally, the story targets the high rate of claims denials for long-term care coverage. Yet in the midst of this bad news, it appears that one insurer at least – Genworth Financial – is keeping insureds reasonably happy. Its complaint rate is a fraction that of its competitors.
While Genworth is probably pleased to be identified as the best of the bunch, I suspect that this story is horrible news for the industry as a whole – and Genworth in particular, as the largest insurer in the segment. Consumer-friendly companies don’t need their entire industry tarnished by the bad behavior of others. They may support government regulation because it has the potential to reduce, or even eliminate, the lousy providers that damage an industry’s reputation.
From a market point of view, perhaps this is bad news. Maybe we want a few lousy insurance companies. In a world with free flow of information, some insureds might prefer to use Conseco notwithstanding the risk that they’ll never be able to collect. This is particularly true if Conseco offers a lower price point in exchange for this risk. (Then, choice of insurance company becomes part of the risk you manage with your premiums.) But in a real world, with highly imperfect access to information (a state that improves, slightly, with today’s story), consumers are probably unaware that the Conseco policy carries greater risk of claim denial. I’m betting the Genworth will be doing all it can to encourage a very public spanking of Conseco and similar companies. It needs regulators to reassure consumers that when they spend $100 a month to insure their long-term care needs, they actually get what they pay for.
March 26, 2007 at 3:00 pm
Posted in: Economic Analysis of Law
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Responses (5)
Frank - March 26, 2007 at 3:10 pm
It looked to me like they identified three bad apples in the charts to that story. And I think it’s clear more regulation would help a great deal here–that LTC in general will collapse as an industry if people have to be terrified that a few ruthless companies will do anything in their power to deny claims on the flimsiest of reasons.
It reminds me of that great book by Shell, “Make the Rules or your Rivals Will.” In a properly regulated LTC market, stonewalling tactics like Conseco’s would not be fair. But if they are allowed to continue, ceteris paribus, the companies that adopt them may well best the more conscientious providers. As the NAEIC executive said in the story, the big strategy for the unscrupulous here is to fight policyholders till they die.
Matt Bodie - March 26, 2007 at 4:18 pm
This is a paradigmatic Akerlof-”market for lemons” problem. That’s why you need more regulation — either by statute or through bad-faith common-law contract actions.
Matt Bodie - March 26, 2007 at 4:28 pm
One proviso: there is apparently information available about per capita customer complaints. How did the Times get that information? How widely distributed is it? If there is a way to insure that consumers get this information, the market should take care of itself. But of course bad companies would still be liable for breach of contract.
David - March 26, 2007 at 5:34 pm
Good point, Matt, but I’m not sure the market would completely correct itself, even if that information is widely available.
Prospect theory has found that people are more risk-seeking when it comes to losses, and therefore might choose a socially sub-optimal level of insurance coverage. They’ll prefer a lower certain loss in terms of a lower premium with terrible LTC than a higher-expected loss from a higher premium but better LTC.
Regulation can help correct this imbalance.
David - March 26, 2007 at 5:37 pm
Whoops — correcting last confusing post. Problem is people would systematically improperly choose
EV1(low premium, bad ltc)Whoops — correcting last confusing post. Problem is people would systematically improperly choose
EV1(low premium, bad ltc)< EV2(high premium, good ltc).
Without regulation, EV1 could come to dominate the market, even though EV2 provides a higher social benefit. Moreover, when you factor in things like network effects and economies of scale, we need regulation to keep the market from tipping to the wrong standard.
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