The Market for Ignorance in Insurance

Insurance is mostly sold on the basis of ignorance, not information. That needs to change.

Recently I bought a small television for my bedroom. At $229 for a modest luxury it was not a life-changing event, and though I’m not entirely happy with the purchase (the sound is a little tinny) the consequences are minor.  But 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 could be catastrophic in the event of a major loss if I bought the wrong coverage from an unreliable company. That’s because insurers market ignorance, and a major opportunity for innovative insurers is 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, and as between brands, 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.

Now think about buying homeowners insurance. Price comparison is pretty easy. 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 there is little hope that insurers will change this situation.

Therefore, there needs to be another type of response that does not depend on the market: better regulation. Several of the Essential Protections for Policyholders that address Buying Insurance are directed at that goal:

• Consumers should have easily available, understandable information and tools for comparing coverage in insurance policies.
• Consumers should have easily available, understandable information about insurance companies’ claim practices.
• Policyholders should be given clear information about their own insurance policies.

A few examples: 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.

Insurance is a market commodity but there are significant failures in the market for insurance information. Better regulation is needed to fill the gap.

Jay Feinman