NAIC/CONSUMER LIAISON COMMITTEE · Ragin—wrote in their research paper, The Influence of Sellers...

© 2019 National Association of Insurance Commissioners 1

NAIC/CONSUMER LIAISON COMMITTEE

NAIC/Consumer Liaison Committee April 8, 2019, Minutes NAIC/American Indian and Alaska Native Liaison Committee April 7, 2019, Minutes

Attachment One Consumer Liaison Committee

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Draft Pending Adoption


Draft: 5/1/19

NAIC/Consumer Liaison Committee Orlando, Florida

April 8, 2019 The NAIC/Consumer Liaison Committee met in Orlando, FL, April 8, 2019. The following Committee members participated: Stephen C. Taylor, Chair (DC); Michael Conway, Vice Chair (CO); Lori K. Wing-Heier (AK); Jim L. Ridling represented by Mark Fowler (AL); Ricardo Lara and Lucy Jabourian (CA); Andrew N. Mais represented by Kurt Swan (CT); Trinidad Navarro (DE); David Altmaier (FL); Jim Beck (GA); Dean L. Cameron represented by Elaine Mellon (ID); Stephen W. Robertson represented by Karl Knable (IN); Vicki Schmidt (KS): Nancy G. Atkins represented by Josh Rayborn (KY); James J. Donelon represented by Ron Henderson (LA); Al Redmer Jr. represented by Nour Benchaaboun (MD); Steve Kelley represented by Peter Brickwedde (MN); Chlora Lindley-Myers (MO); Mike Causey represented by Tracy Biehn (NC); Bruce R. Ramge (NE); John G. Franchini represented by Paige Duhamel (NM); Barbara D. Richardson represented by David Cassetty (NV); Linda A. Lacewell represented by Troy Oechsner (NY); Jillian Froment represented by Jana Jarrett (OH); Jessica Altman (PA); Kent Sullivan represented by Leah Gillum (TX); Todd E. Kiser represented by Nancy Askerlund (UT); Scott A. White represented by Donald Beatty (VA); Mike Kreidler represented by Jane Beyer (WA); Mark Afable (WI); and James A. Dodrill (WV). 1. Heard Introductory Remarks of Chair

Commissioner Taylor welcomed the twelve regulator and consumer members of the 2019 NAIC Consumer Participation Board of Trustees (Board). He also welcomed the thirty-four 2019 consumer representatives, who were selected by the 2018 Board to present the consumer perspective at NAIC meetings. Commissioner Taylor, who is also the Board chair, said the Board finalized its revisions to the Plan of Operation for the NAIC Consumer Participation Program (Program) when it met earlier. He said the revised document would go to the Executive Committee for its consideration at a future meeting. He also said the Board met in closed session because the administration of the Program may require discussions of a confidential nature concerning personal information. 2. Adopted its 2018 Fall National Meeting Minutes Commissioner Dodrill made a motion, seconded by Commissioner Conway, to adopt the Committee’s Nov. 17, 2018, minutes (see NAIC Proceedings – Fall 2018, NAIC/Consumer Liaison Committee). The motion passed unanimously.

3. Heard a Presentation on the Persistent Problem of Unintended Underinsurance Amy Bach (United Policyholders—UP) said Kenneth S. Klein is the Louis and Hermione Brown Professor of Law at California Western School of Law. She said he is also a fire survivor who lost his home in the 2003 Cedar Fire, and he is the recipient of the State Bar of California’s 2008 President’s Pro Bono Service Award for his work with survivors of natural disasters. She said he has worked pro bono with hundreds of disaster survivors across the nation on the entire array of insurance issues that can arise, as well as consulted with insurance professionals, state insurance regulators, legislators, and attorneys over the last 15 years. She said he has published numerous pieces on these issues ranging from opinion editorials in the Los Angeles Times to scholarly research in the Connecticut Insurance Law Journal. Ms. Bach said UP is conducting “Road to Recovery” surveys six, 12 and 24 months after a fire disaster as an outreach to all impacted households. She said survey results indicate that over two-thirds of households did not think they had enough insurance to replace or rebuild their homes following a disaster, which means those households were underinsured. She said underinsurance means the policy has limits below replacement cost and protection gaps exist due to actual cash value (ACV), which is calculated by subtracting depreciation from replacement cost, only payouts on roofs; high deductibles; and unexpected exclusions or limitations regarding mold, water damage, and building code compliance. She said California solutions attempted to date include the legislature twice mandating standardized disclosures of ACV, replacement cash value (RCV), and guaranteed replacement cost (GRC) differences with insurance regulations saying if a carrier estimates RCV at point of sale, it must include enumerated features. She said policyholders still have a duty to select the coverage limits that are right for their needs; however, she also said homeowners should be able to rely on insurance they buy as a safety net in case of total losses. She said the CA Ins. Code at Section 10103.4, which is effective July 1, 2019, states:

(a) An insurer that provides replacement cost coverage...shall, on an every other year basis, at the time an offer to renew a policy of residential property insurance is made to the policyholder, provide an estimate of the cost necessary


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to rebuild or replace the insured structure that complies with Sections 2695.180 to 2695.183, inclusive, of Article 1.3 of Subchapter 7.5 of Chapter 5 of Title 10 of the California Code of Regulations. The estimate shall include:

(1) Cost of labor, building materials and supplies; (2) Overhead and profit; (3) Cost of demolition and debris removal; (4) Cost of permits and architect's plans; and (5) Consideration of components and features of the insured structure, including at least the following:

(A) Type of foundation; (B) Type of frame; (C) Roofing materials and type of roof; (D) Siding materials and type of siding; (E) Whether the structure is located on a slope; (F) The square footage of the living space; (G) Geographic location of property; (H) Number of stories and any nonstandard wall heights; (I) Materials used in, and generic types of, interior features and finishes, such as, where applicable, the type of heating and air conditioning system, walls, flooring, ceiling, fireplaces, kitchen, and bath(s); (J) Age of the structure or the year it was built; and (K) Size and type of attached garage.

(b) The estimate of replacement cost shall be based on an estimate of the cost to rebuild or replace the structure considering the cost to reconstruct the single property being evaluated, as compared to the cost to build multiple, or tract, dwellings.

Mr. Klein said he was fully insured when his house burned to the ground in 2003, but most of his neighbors who thought their homes were fully covered for replacement value discovered after the fact that they were not. He said all homeowners intend to have full coverage; however, industry statistics indicate that well over two-thirds are underinsured. He quoted Jay M. Feinman in his book, Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It, as saying, “96 percent of homeowners carry insurance.” He said the prevalence and problem of underinsurance is far more encompassing than just a natural disaster or wildfire problem. He said the frequency of an owner-occupied home not having insurance is trivial, and Professor Feinman’s conclusion is in intuitive harmony with data collected from the U.S. Census Bureau. He said according to the 2015 Housing Survey, of the 56 million owner-occupied homeowners reporting how their purchase or construction was financed, all but 16 million had a down payment of 20% or less. In other words, he said by the terms of their mortgages, slightly over 70% of all mortgaged homes were required, at the time of purchase or construction, to have insurance of at least 80% of the purchase or construction price. He said in 2015, over 60% of all owner-occupied homes with a mortgage had property insurance as part of the monthly mortgage payment. He said two economists—Benjamin L. Collier and Marc A. Ragin—wrote in their research paper, The Influence of Sellers on Contract Choice: Evidence from Flood, that among homeowners who were required to insure; were offered identical insurance products; and had the option to insure to value (ITV), over-insure, or underinsure, 80% were ITV or over-insured. He said the finding is in harmony with intuitive understandings of consumer purchases of homeowner insurance, since: 1) by operation of co-insurance clauses, there is a penalty to less than 80% ITV; 2) the margin of increased premium to move from 80% to 100% is small; and 3) a consumer can be penalized for making small claims, so the consumer is financially incentivized to express price elasticity through increased deductibles, rather than decreased coverage limits. Mr. Klein said the underwriting exercise of predicting rebuild costs in the future is an art as much as a science and one would expect errors to occur equally high and low, in other words, a roughly equal incidence and depth of over-insurance and underinsurance, but he said that is not what is seen. He said the persistent finding over two decades is that almost always over 50% of homeowners are underinsured, and the problem is not improving over time. He said that is particularly troubling because, to an unknown frequency, homeowners will buy an endorsement extending their Coverage A by a fixed percentage ranging from 25% to 200%; therefore, if the cost estimating tools used to predict replacement cost are performing neutrally, the incidence of underinsurance probably should be less than 50% more often than not. He said this is what makes the green dot in the middle of the chart so interesting. He said that is a conclusion of the only study he could find of underinsurance of persons who had purchased endorsements extending Coverage A by a fixed percentage, and he said amongst this population (according to the study conducted by the California Department of Insurance), the incidence of underinsurance still was 57%. He said there is not a similarly robust data set modeling the depth of average underinsurance; the little information he found so far is consistent with, but not compelling of, the conclusion that across all homes, regions and demographics of the U.S., the average depth of underinsurance is at least 20%. He asked why this happens.


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Mr. Klein said there is a country/western song lyric about the road to hell being paved with good intentions (Randy Travis, “Good Intentions,” written by Merle Haggard, Randy Travis and Marvin Coe), and that seems to be what is happening here. He said homeowners want full RCV, homeowners are willing to pay for full RCV, insurers are willing to sell full RCV, insurers and homeowners appear to both think that the coverage in place is full RCV, and yet most homeowners are persistently and unwittingly materially underinsured. He said the reason that happens is that almost without exception, insurance companies employ component-based cost estimation software to identify recommended or required Coverage A coverage limits. He said these are database-driven tools that estimate the cost to rebuild a house down to its nuts and screws, using local wage rates and materials costs, periodically adjusting both for local fluctuation over time and the likelihood of particular addresses having a loss from a natural disaster resulting in a demand surge idiosyncratically driving cost. He said the two dominant vendors of these tools are Verisk Analytics and CoreLogic, who if their U.S. Securities and Exchange Commission (SEC) filings are correct, between them account for the Coverage A limits expressed in the vast majority of homeowner insurance policies. He said as a general matter, their tools can within an acceptable margin of error estimate actual rebuild costs, but he said that requires both time and expertise, because accuracy can quickly erode with insufficient, precise detail, such as the anticipated mitering of a kitchen countertop, which implicates both materials and labor costs. He said to get good estimates requires many hours of data input by a person with building contractor levels of expertise, and that is time and expertise in which no insurer (or insured) can or will invest. In order for Verisk Analytics and CoreLogic to be able to sell their product (their customers are insurers, not insureds), he said they must build in shortcut functions—the ability to get an estimate based on the answer to as few as two, three, or at least no more than a dozen questions without anyone debating that these shortcuts act as an exponential amplifier of error rates. While keeping this in mind, Mr. Klein said to remember the green dot from the previous slide. He said it suggests an important but unidentified error in the way component-based cost estimators calculate rebuild costs; therefore, what results is Coverage A coverage limits being calculated using tools purporting to accurately predict full RCV but which in fact repetitively understate those limits. He said that result is expressed to the state insurance departments through consumer complaints, especially but not entirely, in the wake of a mass loss event such as a tornado, hurricane or wildfire. He said the challenge is to simultaneously give insurers the business flexibility to be able to profitably price and promote risk, and yet, give consumers access to the full insurance that they need. Mr. Klein said one solution is to allow insurers to price and promote risk however the insurer chooses, within the familiar regulatory guardrails of neither threatening the financial stability of the insurer nor constitute price gouging, but require that since the profit from error (over-insurance) is realized by the insurer, so too should the cost of error (underinsurance) be realized. In other words, he suggested having the responsibility for pricing error reside with the party with access to pricing information and control setting the price; but then, having done so, he suggested not letting the consumer avoid responsibility from an intentional underinsurance choice. He said a law or regulation that would do that might say:

(a) For every policy of residential property insurance that is newly issued or renewed in this state, an insurer shall offer insurance for the full replacement of the insured property. (b) If the insured purchases the policy or renewal described in section (a), then, if the policy coverage limit is not enough to replace the insured property, the insurer shall be liable for the actual replacement cost. (c) If the insured does not purchase the policy or renewal described in section (a), then, if the policy coverage limit is not enough to replace the insured property, the insurer shall not be liable for the actual replacement cost. (d) This section shall not be deemed to limit or preclude an insurer and insured from agreeing to provide coverage for a policy limit that is lesser than the estimate of replacement value provided in accordance with subdivision (a).

Mr. Klein said legislation like this simply requires that every time an insurer quotes home insurance–either as a new policy or as a renewal—that the insurer price and quote a full replacement value option. If the customer opts to not buy that option, then that is on the consumer. If the customer does buy that option and Coverage A is inadequate, the policy is reformed to provide actual full RCV coverage. Mr. Klein said this solution gives the insurer full flexibility to price and promote its products as it chooses, while protecting the consumer from unintended, profound underinsurance; and it has the side advantages of dramatically reducing the frequency and costs of post-event legal disputes, which while bad for an attorneys business model, could be quite good for everyone else. Commissioner Altmaier asked how the two-thirds of insureds know they are underinsured. Ms. Bach said the majority find out after a catastrophic loss has occurred. Commissioner Beck asked if the studies indicated any consumer resistance to quoting full coverage. Ms. Bach said research indicated that consumer demand is for an instant electronic quote for all types of insurance and any delay in receiving it results in consumers moving on to a company from whom they can get an instant quote. 4. Heard a Presentation on Insurance Interference with the Performance of Automobile Repairs


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Erica Eversman (Automotive Education & Policy Institute—AEPI) said vehicles are being put back on the road that are not safe because there are no federal or state law dictating safe repairs, no post-repair safety inspection, and no prohibition on dangerous techniques like “clipping.” She said clipping is a term that is used when an automobile sustains front or rear-end damage in an accident; the damaged half is cut away and replaced by welding a new front or rear-end onto the damaged vehicle. She said it is a legal and safe way to repair damaged vehicles; however, welding is often not paid for by insurance companies, but using adhesive to glue the two halves of the damaged vehicle together is paid for by insurance companies. She said automotive repair shops then opt to use the type of repair that is paid for by insurance companies. However, no one notifies car owners that such repairs void their manufacturer’s warranty. Ms. Eversman said the AEPI has been advocating for 20 years to make it illegal to do this and referred to the photo of a clipped car seconds after its second accident. She said the car was split in half after being hit broadside—not by another car—but rather by a motorcycle. She said the 2017 case of Seebachan v. John Eagle Collision involved a Honda-certified repair facility that was an insurer “preferred collision repairer” or designated repair provider (DRP) shop that repaired a Honda Fit damaged in a hail storm in accordance with how the insurer would pay. She said the insurer would not pay for the original equipment manufacturer (OEM) standards required procedure of welding, so the car was repaired using “structural adhesive.” She said an accident involving the same vehicle that occurred after such repairs caused life-threatening burns to a young couple riding in the car with the husband spending two years in a hospital, and the court awarded a $42 million verdict, in compensatory damages only, to the couple from the repair shop. She said the repair shop allowed insurer interests to override OEM judgement on proper, safe repair for a cheaper, cost-cutting method, and the Seebachans are suing the insurer. Ms. Eversman said this was not an isolated incident, as insurers withhold payment routinely for necessary OEM mandated procedures affecting safety. She said there are no statistics to point to on how many deaths due to faulty repairs as the National Highway Traffic Safety Administration (NHTSA) does not collect data for the Fatality Analysis Reporting System (FARS) on prior vehicle damage or repair. She said the OEM requires both pre-vehicle scans, which can identify areas where necessary repairs are needed, and post-vehicle scans, which can confirm that necessary repairs have been made and that the vehicle is safe to return to the road. She said insurers routinely refuse one or both scans; and, the decision is determined on a case-by-case basis. She said failure to perform OEM procedures affecting safety can interfere with airbag deployment timing, render specialty high-strength steels brittle, or materially impair crumple zones of passenger compartments. She said national collision repair organizations that officially endorse the use of OEM procedures include the Society of Collision Repair Specialists (SCRS), the Automotive Service Association (ASA), Alliance of Automotive Service Providers (AASP), and the Assured Performance Network. She said OEM procedures are the industry standard and insurer estimates that state insurers pay to repair per “generally accepted industry standards,” but many insurers refuse to pay for OEM safety-related procedures. Ms. Eversman said the position of the Inter-Industry Conference on Auto Collision Repair (I-CAR) is to always follow vehicle maker procedures. She said I-CAR serves and is represented by all segments of the inter-industry, including collision repair, insurance, original equipment manufacturers, education, training, research, tools, equipment, supply, and related industry services. She said auto manufacturers, including the Alliance of Automotive Manufacturers and the Association of Global Automakers, globally endorse OEM procedures as repair industry standards. She said legislation for OEM procedures is pending in Connecticut, Illinois, Louisiana, Minnesota, Mississippi, Montana and New Hampshire. She said the current arbitration policy of the National Auto Auction Association (NAAA) states that the dealer must disclose in the Seller Disclosure Requirements section of the sales contract any structural repair not made per OEM guidelines. 5. Heard a Presentation on Insurers’ Use of Criminal History Databases and Scores Birny Birnbaum (Center for Economic Justice—CEJ) said advocates of algorithmic techniques like data mining argue that they eliminate human biases from the decision-making process. He said an algorithm is only as good as the data it works with and that data mining can inherit the prejudices of prior decision-makers or reflect the widespread biases that persist in society at large. He said the “patterns” it discovers are simply preexisting societal patterns of inequality and exclusion. He said unthinking reliance on data mining can deny members of vulnerable groups full participation in society. He said America’s poor and working-class people have long been subject to invasive surveillance, midnight raids, and punitive public policy that increase the stigma and hardship of poverty. He said during the 19th century, these people were quarantined in county poorhouses; and during the 20th century, they were investigated by caseworkers and treated like criminals on trial. He said currently a digital poorhouse has been forged from databases, algorithms and risk models. He said it promises to eclipse the reach and repercussions of everything that came before. He said TransUnion (TU) recently evaluated the predictive power of court record violation data, including criminal and traffic violations. Also, as court records are created when the initial citation is issued, TU said they provide insight into violations beyond those that ultimately end up on the motor vehicle record (MVR), such as violation dismissals, violation downgrades, and pre-adjudicated or open tickets. Mr. Birnbaum asked what the likelihood is that TU criminal history scores have a disparate impact against African Americans. He then said to consider policing records in Ferguson, MO.


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Mr. Birnbaum said the U.S. Department of Justice (DOJ) investigation of the Ferguson Police Department’s (FPD) approach to law enforcement both reflects and reinforces racial bias, including stereotyping. He quoted the DOJ report as saying the harms of Ferguson’s police and court practices are borne disproportionately by African Americans, and there is evidence that this is due in part to intentional discrimination based on race. The report also said Ferguson’s law enforcement practices overwhelmingly impact African Americans. It said data collected by the FPD from 2012 to 2014 shows that African Americans account for 85% of vehicle stops, 90% of citations, and 93% of arrests made by FPD officers, despite comprising only 67% of Ferguson’s population. The DOJ said the FPD appears to bring certain offenses almost exclusively against African Americans. For example, from 2011 to 2013, African Americans accounted for 95% of Manner of Walking in Roadway charges, and 94% of all Failure to Comply charges. This investigation indicates that this disproportionate burden on African Americans cannot be explained by any difference in the rate at which people of different races violate the law. Rather, the investigation has revealed that these disparities occur, at least in part, because of unlawful bias against and stereotypes about African Americans. Mr. Birnbaum said algorithms based on data reflecting historical unfair discrimination will reflect and perpetuate that unfair discrimination. He said using such biased data in a computer model does not eliminate that unfair bias; i.e., it codifies that bias in the guise of an objective analysis. He said a sacred principle of the American criminal justice system is that a defendant is innocent until proven guilty. He said the 14th amendment to the U.S. Constitution guarantees every person due process and equal protection under the law. He said criminal history scores and databases sabotage these consumer rights and protections. He said the consumer protections in the federal Fair Credit Reporting Act (FCRA) permits insurers to utilize consumer reports provided by consumer reporting agencies for insurance underwriting. He also said consumer credit reports are examples of a consumer report. He said the FCRA requires critical consumer protections, including: 1) permission by the consumer to access and use the consumer report; 2) notification if an adverse action has resulted from the use of the consumer report; 3) an opportunity to obtain a copy of the consumer report; 4) an opportunity to correct an erroneous consumer report; and 5) an opportunity to request reconsideration based on a corrected consumer report. Mr. Birnbaum said many databases marketed to insurers evade the consumer protections of the FCRA. One example is LexisNexis databases, which are not provided by consumer reporting agencies, as that term is defined in the FCRA, and does not constitute consumer reports, as that term is defined in the FCRA. Accordingly, he said this database may not be used in whole or in part as a factor in determining eligibility for credit, insurance, employment or another purpose in connection with which a consumer report may be used under the FCRA. Due to the nature of the origin of public record information, the public records and commercially available data sources used in reports may contain errors. Mr. Birnbaum said source data is sometimes reported or entered inaccurately, processed poorly or incorrectly, and is generally not free from defect. He said this product or service aggregates and reports data, as provided by the public records and commercially available data sources, and is not the source of the data, nor is it a comprehensive compilation of the data. He also said before relying on any data, it should be independently verified. He said consumer reports not subject to the FCRA and that do not need to comply with it are those that are not used for underwriting. He said the potential for unfair discrimination and biased algorithms reflecting and perpetuating historical discrimination exists for claims settlement and antifraud as much as for insurance pricing. He also said there is potential for improper use of non-FCRA databases for FCRA purposes; e.g., utilizing non-FCRA criminal history data for underwriting and pricing. Mr. Birnbaum said algorithms reflect bias in data and bias in modelers. Considering data used in antifraud models, he said these models tap a variety of data sources to identify characteristics of the consumer and/or the claim correlated with a fraudulent or suspicious claim. He said The Role of Data and Analytics in Insurance Fraud Detection says, “Unstructured data has become an opportunity instead of a problem. Many insurers have the ability to change unstructured information into structured data and actively mine this for the opportunities available therein.” It also says, “This [propensity] modelling is used to determine the likelihood of a new policy holder to commit a fraudulent act, and it can be done in real-time.” and “Fraud detection has changed in its location relative to the insured. Insurers are now able to run predictive and entity analytics during multiple touch points, essentially as each new piece of information is added. This not only improves detection capabilities in the event of fraud, but it also allows an insurer to assess a fraud-risk. Some have begun providing risky policy holders with high-priced policies in order to drive them to other service providers.” Mr. Birnbaum said action needed by state insurance regulators to protect consumers regarding insurer’s use of criminal history data would be to: 1) investigate by surveying insurers on the sources and uses of consumer’s criminal history data and surveying purveyors of criminal history data and algorithms for the sources and uses of their products; 2) evaluate by identifying appropriate and inappropriate uses of criminal history data; 3) protect consumers and promote fair competition by requiring FCRA-type consumer protections and disparate impact analysis of uses and applications of criminal history data; and 4) establish an NAIC joint working group of the Market Regulation and Consumer Affairs (D) Committee and the Big Data (EX) Working Group to assist the states.


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6.. Heard a Presentation on a “Deeper Dive” on Short-Term Health Plans Justin Giovannelli (Georgetown University Center on Health Insurance Reforms—GUCHIR) said the GUCHIR published a study in January 2019 with support from the Robert Wood Johnson Foundation titled, The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses. He said the goal of the study was to assess how short-term, limited duration insurers are marketing their products and determine if these tactics changed during the open enrollment period (OEP) for federal Affordable Care Act (ACA)-compliant coverage. He said eight states were studied during October and November 2018 (prior to and during the OEP) resulting in two separate reports: Colorado, Florida, Idaho, Maine, Minnesota, Missouri, Texas and Virginia. He said the studies were conducted using: 1) internet scans using search terms, such as cheap health insurance, short-term health insurance, Obamacare plans, and ACA enroll; 2) answering broker calls with a consumer profile of age 29, healthy and $20,000 yearly income; and 3) insurer website scans. Eric Ellsworth (Consumers’ Checkbook/Center for the Study of Services) said marketing for short-term products dominated search returns during the OEP. He said websites providing information about, or enrollment for, non-ACA-compliant products, including short-term plans, appeared four times as frequently during the OEP as did ACA-only sites. He also said prior to the OEP, this ratio was 77:1. He said marketing content encouraged consumers to consider short-term products as a replacement for ACA coverage and that this was the case both before and during the OEP. He said web searches pointed consumers to non-compliant products and provided little information to inform purchases. He said lead-generating websites were the most common search result in every state, comprising more than half of results before and during the OEP. He said lead-generators provide limited, if any, information about plan benefits, cost sharing or rates. He also said web brokers and issuers made available more information and plan details, but authors encountered no website that provided detailed policy documents, including a contract, prior to sale. He said several lead-generators used the OEP for ACA coverage as a marketing hook, but none directed consumers to https://www.healthcare.gov. He said brokers tried to make quick phone sales without providing written information. He said brokers did not provide information about the plan type (i.e., whether it was short-term coverage) unless asked, with half recommending non-compliant coverage to this subsidy-eligible consumer; and the two that did suggest an ACA plan, recommended that it be bundled with supplemental coverage products; and pressed the consumer for a quick purchase, but almost all refused, or failed, to provide written plan information when asked. He said as of March 2019, 24 states have some type of legislation about short-term limited duration insurance. Sarah Lueck (Center on Budget and Policy Priorities) said results from in-depth interviews by the Kleimann Communication Group (Kleimann) testing consumers’ understanding of short-term plans, which present a challenge to consumers, show that confused consumers do not understand the complex and limited nature of short-term products. She said these products are aggressively marketed to consumers as an alternative to ACA plans by not explaining that such products do not comply with ACA standards, in that they do not cover standard benefits, renewability or preexisting conditions. She said consumers may be stuck with very high out-of-pocket costs because disclosures intended to protect consumers depend on understanding complex concepts. She said the study goals used a marketing brochure for a six-month, best-selling short-term plan currently being marketed in seven states to assess consumers’ use of plan brochures to determine if consumers understand the benefits, exclusions and other plan limits, and out-of-pocket costs. The methods used by Kleinmann were that nine of 10 participants, consisting of a mix of income, race and gender, were recruited—half with chronic conditions and half without chronic conditions—in St. Louis, MO. Ms. Lueck said in-depth interviews asked participants to read and discuss a plan brochure for a commonly-sold plan. She said key findings from this study found that consumers: 1) did not notice the federally-mandated disclosure; 2) made assumptions about what was covered based on the ACA framework—that maternity or prescription drugs would be covered; 3) struggled to understand limitations related to pre-existing conditions—thought such conditions would be covered; and 4) could not understand the plan’s cost-sharing requirements or apply basic financial scenarios—such as using deductible and coinsurance. Based on the study’s findings, Ms. Lueck said their recommendations are that: 1) the Model Regulation to Implement the Accident and Sickness Insurance Minimum Standards Model Act (#171) includes robust standards for short-term plans; 2) the Market Regulation and Consumer Affairs (D) Committee expedites approval of the short-term plan data call; and 3) state policymakers further regulate short-term plans. 7. Heard an Update on the Latest Recommendations from the USPSTF Lucy Culp (American Heart Association) said the U.S. Preventive Services Task Force (USPSTF) develops recommendations for preventative services in the U.S. and provides updates annually to those recommendations. She said the USPSTF is an independent, volunteer panel of national experts that publishes evidence-based recommendations about clinical preventive services in an open and transparent process for updating recommendations that include ACA mandates that private insurance plans and Medicaid expansion programs cover under preventive services with a USPSTF A or B rating at no cost to the consumer. She said the plans must provide the preventive service without cost sharing beginning in the plan year that begins


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at least one year following the final USPSTF recommendation. She said the latest update includes pre-exposure prophylaxis (PrEP) and new colorectal cancer screening guidelines. Amy Killelea (National Alliance of State and Territorial AIDS Directors—NASTAD) said PrEP is a once-daily antiretroviral medication that prevents human immunodeficiency viruses (HIV). She said there is only one Food and Drug Administration (FDA) approved medication for PrEP right now, but more medications are in the pipeline. She said it is an incredibly effective, but underused, prevention tool with a small percentage of the 1.1 million Americans eligible for PrEP accessing it. She said increasing PrEP uptake features prominently in the new initiative from the Administration to end new HIV infections by 2030. Luc Athayde-Rizzaro (National Center for Transgender Equality) said in November 2018, the USPSTF released a draft Grade A recommendation for PrEP that clinicians offer PrEP with effective antiretroviral therapy to persons who are at high risk of HIV acquisition. He said anticipated implementation challenges include: 1) underwriting methods used in discriminatory or stigmatizing ways that could limit access to medication; 2) limiting access to PrEP services such as HIV, hepatitis, and sexually transmitted infections (STI) testing at initiation and every three months, as well as follow-up provider appointment every three months, all of which should be covered without cost sharing; 3) identifying individuals at high risk; and 4) accounting for different delivery systems for PrEP. He said recommendations for state insurance regulators are implementation guidance, monitoring and enforcement, which will be critical once the recommendation is final. He said state insurance regulators may also consider bulletins and other communications to make plans aware of the coverage, utilization review, and cost-sharing requirements. He said resources include: 1) the USPSTF draft recommendation for PrEP; 2) the Centers for Disease Control and Prevention (CDC), clinical practice guidelines for PrEP; 3) the Centers for Medicare & Medicaid Services (CMS), limitations on cost-sharing under the ACA frequently asked questions (FAQ); and 4) New York State Department of Financial Services, Insurance Circular Letter No. 21 (2017) that includes guidance for plans to cover PrEP and the reiteration of application of state non-discrimination requirements to PrEP coverage. Anna Howard (American Cancer Society Cancer Action Network—ACS CAN) said in 2018, the ACS updated its colorectal cancer screening guidelines and now recommends that adults aged 45 years and older with an average risk of colorectal cancer undergo regular screening with either a high-sensitivity, stool-based test or a structural exam (such as a colonoscopy), depending on patient preference and test availability. She said as a part of the screening process, all positive results on non-colonoscopy screening tests should be followed up with a timely colonoscopy, and more information on screening guidelines is available at https://www.cancer.org. She said existing state mandates are that some states require private insurers and/or state Medicaid programs to use ACS guidelines to inform colorectal cancer screening requirements (automatic), and some states consult ACS guidelines with those states requiring additional steps for a coverage change. Having no further business, the NAIC/Consumer Liaison Committee adjourned. W:\National Meetings\2019\Spring\Cmte\CONSUMER\04 min_Consumer rev 050119 sct.docx


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Draft: 4/23/19

NAIC/American Indian and Alaska Native Liaison Committee Orlando, Florida

April 7, 2019 The NAIC/American Indian and Alaska Native Liaison Committee met in Orlando, FL, April 7, 2019. The following Liaison Committee members participated: Michael Conway, Chair (CO); Lori K. Wing-Heier, Vice Chair (AK); Trinidad Navarro and Frank Pyle (DE); Dean L. Cameron represented by Elaine Mellon (ID); Matthew Rosendale represented by Bob Biskupiak (MT); Mike Causey represented by Tracy Biehn (NC); John G. Franchini represented by Paige Duhamel (NM); Glen Mulready represented by Courtney Khodabakhsh (OK); Andrew Stolfi (OR); Larry Deiter represented by Frank Marnell (SD); and Mike Kreidler (WA). 1. Adopted its 2018 Fall National Meeting Minutes Director Wing-Heier made a motion, seconded by Ms. Biehn, to adopt the Liaison Committee’s Nov. 16, 2018, minutes (see NAIC Proceedings – Fall 2018, NAIC/Consumer Liaison Committee, Attachment One). The motion passed unanimously. 2. Discussed the Rising Epidemic of Youth Suicide in American Indians and Alaska Natives Commissioner Conway said, due to the cancellation by the speaker, a last-minute change was made to the agenda. He asked members to help lay the groundwork for the Liaison Committee to use in its approach to this problem so they could get more help to youth this year by discussing the issue of youth suicide in tribal communities, rather than hear a presentation. Director Wing-Heier said the Liaison Committee would like to hash out the goals at this meeting, because there is no place for tribal kids, especially those in rural or isolated locations, to get any type of assistance when it is most desperately needed. Mr. Biskupiak said the opioid issue is the leading cause of the rise in youth suicide in the American Indian population. Commissioner Stolfi said state insurance regulators can and should do something, perhaps from an educational angle, in order to train physicians and first responders to learn how to spot the problem early. Ms. Duhamel suggested insurance companies be asked to present to the Liaison Committee at future national meetings on how their company’s case managers work with state insurance regulators on these issues. Commissioner Conway said he approached one company about this issue at the National Congress of American Indians (NCAI) 75th Annual Convention and Marketplace in Denver, CO, in fall 2018 with this suggestion and was basically told to “pound sand”; i.e., the company was not interested in pursuing it. Andrew Sperling (National Alliance on Mental Illness—NAMI) said suicide is the 10th leading cause of death in the U.S., with 47,000 deaths and 1.4 million attempts in 2018, representing a cost of $69 billion. He said 21.5% of those were for American Indians, which is three-and-a-half times higher than that of the total population. Mr. Sperling said in the behavior health realm, the best evidence for preventing youth suicide can be found in proactive action. He said the national strategy for suicide prevention in 2018 was based, in the most part, on seven steps: 1) identification (training primary care physicians to recognize the signs of possible suicide attempts when young people are being seen for other conditions that may not be directly related to suicide); 2) risk assessment; 3) screening; 4) suicide care management; 5) removal of means (guns, drugs, etc.); 6) transition to warm (supportive contacts); and 7) improve policies and procedures. Mr. Sperling said better engagement is needed with Indian Health Services (IHS) so front-line clinic staff can be trained to intervene with this suicide prevention protocol. He said the federal Mental Health Parity Act was a start, but that it needs a behavioral health care workforce to implement it fully. He said NAMI would be happy to help the NAIC with this endeavor, potentially through its family-to-family protocol. Commissioner Conway said the Liaison Committee needs to be cognizant that American Indians are members of sovereign nations, but the Liaison Committee could possibly help tribes see what to do. He said becoming culturally aware is critical before any help is offered by the Liaison Committee. Director Wing-Heier asked if telehealth programs would work in the more rural areas like Alaska. Mr. Sperling said there is no behavioral health care available in villages, where follow-up contact is the most needed.


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Ms. Duhamel suggested tribal communities do this type of follow-up themselves. She said there are some insurance companies started by tribes themselves, noting that the Liaison Committee could ask these companies how they are handling this issue. Commissioner Kreidler said the U.S. Public Health Service Commissioned Corps might be able to help, noting that his office could provide a contact name. Mr. Sperling said he has the name of the assistant director of the U.S. Department of Health and Human Services (HHS). Lisa Wilson (Centers for Medicare and Medicaid Services’ Center for Consumer Information and Insurance Oversight—CCIIO) said she has formal working relationships with tribal leaders. She said the CCIIO works with tribal members on eligibility and how to get enrolled with special protection through health care exchanges. She said tribal members can get this type of help through IHS, even if they purchase coverage on the exchange. She said for tribal members to be eligible, they must demonstrate tribal membership through documentation, which can be obtained online or by postal mail. She said fact sheets and forms are available for monthly enrollment purposes in this ongoing work in Indian Country and that there are no copays nor deductibles. She said technical webinars and sample Summary of Benefits and Coverage (SBC) forms are available for zero cost-sharing plans. Director Wing-Heier asked if there is any way an Alaska Native could continue to be enrolled year after year, rather than having to start and stop enrollment every year, especially when the premiums are paid for many tribal members as falling below the 300% of the poverty level. Ms. Wilson said the CCIIO team often goes to Alaska corporations in order to do listening sessions and would investigate this question prior to the next trip. 3. Discussed the Removal of Tribal Health Resources from the U.S. Department of Health and Human Services (HHS) Website

Commissioner Conway said this topic is being reviewed by NAIC Legal Division staff and will be discussed further at the Summer National Meeting. Director Wing-Heier said there is a lot of information included in the head table packet, which was distributed to Liaison Committee members and interested regulators for their review about this topic. Silvia Yee (Disability Rights Education and Defense Fund—DREDF) said different agencies do separate pieces, so it is tough to lay responsibility for the lack of available care. She said schools have programs in special education classes and in regular education classes; state and federal dollars are used differently; accessibility is an issue for those with disabilities; there is a lack of sports programs, which help build confidence in young people; programs need to be available such as wheelchair basketball; finding a provider who looks like you if you are a disabled youth or a tribal youth; it is a basic cultural issue; education needs to be funded for American Indians and Alaska Natives to pursue behavior science as a career, then return to their tribes in order to help others. Commissioner Conway agreed and said perhaps such care could be brought to the tribes now via telehealth or telemedicine. Director Wing-Heier suggested something like Project ECHO (Extension for Community Healthcare Outcomes) be used for this purpose. Ms. Duhamel said she has a close friend whose focus is on American Indian health care issues who is working with the American Speech-Language-Hearing Association and was recently asked to speak on audiology issues. She said she will ask her friend to present this report to the committee when the report is finished. Having no further business, the NAIC/American Indian and Alaska Native Liaison Committee adjourned. W:\National Meetings\2019\Spring\Cmte\CONSUMER\AMERICAN_INDIAN\04_Min Americanindian.Docx


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March 15, 2019

“Direct Enrollment” in Marketplace Coverage Lacks Protections for Consumers, Exposes Them to Harm

New “Enhanced Direct Enrollment” Heightens Risks By Tara Straw

The Affordable Care Act (ACA) established health insurance marketplaces to serve as a single place where consumers could compare health plans based on price and quality and apply for financial assistance. All marketplace plans meet a consistent set of standards: they cover a core set of benefits, can’t set premiums based on health status or gender, and are displayed in an impartial way to simplify consumer decision-making. Consumers can submit a single application at the marketplace website to connect with the type of health coverage they’re eligible for, whether Medicaid, the Children’s Health Insurance Program (CHIP), or a private plan.

But today, many people use websites other than the marketplaces to enroll in marketplace plans and apply for ACA subsidies. Through a federally created pathway called “direct enrollment” (DE), insurance companies and brokers (including web-based brokers) use their own websites to help people enroll in marketplace plans and access subsidies. And in late 2018, the federal government began approving entities to use the “enhanced direct enrollment” (EDE) pathway, which allows insurers and brokers to handle the entire application process, eliminating all direct contact between the consumer and the marketplace.

Direct enrollment raises several concerns, primarily because DE entities lack the benefits and protections that the ACA marketplaces provide. Among the concerns:

• Many DE entities offer plans that don’t comply with ACA standards, and they maybenefit financially if they enroll more people in them. Some insurers and brokersoperating through DE offer short-term health plans and other types of plans that don’t meetACA consumer protections and benefit standards but pay high commissions to agents andbrokers. Federal rules bar DE entities from displaying these plans alongside marketplaceplans, but some DE sites use screening tools to shift consumers away from marketplaceoptions. This raises a serious threat to both consumers and the ACA marketplace if insurersand brokers use their status as approved DE entities to enroll consumers in non-compliantplans. Also, the sites’ screening tools collect personal and health information that can be usedfor future marketing of non-compliant plans.

1275 First Street NE, Suite 1200 Washington, DC 20002

Tel: 202-408-1080 Fax: 202-408-1056

[email protected] www.cbpp.org

Attachment Two Consumer Liaison Committee

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For example, one web broker’s listing of “Health Insurance” options often shows only non-ACA plans; the site lists ACA-compliant plans under “Obamacare Coverage.”1

• People who are eligible for Medicaid or other programs may face additional barriers toenrolling when they rely on a DE website. The marketplace has a “no wrong door” policy,meaning that consumers who go to the marketplace website can fill out one application andbe routed to Medicaid, CHIP, or marketplace subsidies based on the information theyprovide. But some DE websites divert consumers from the marketplace application processbefore they even reach it, by not informing them that they might be eligible for no-costcoverage or by steering them toward non-ACA products.

One health insurance issuer encourages consumers with Medicaid-eligible children to “buy a plan direct” from them, which bypasses the marketplace’s single streamlined application that would indicate their child’s Medicaid eligibility.

• DE websites prevent consumers from fully comparing private health plans based onprice and quality, which impedes competition among insurers. Unlike marketplacewebsites, which allow people to compare all qualified health plans on an apples-to-applesbasis, DE entity websites may not present all available marketplace plans or comparable planinformation. Moreover, DE entities may have financial incentives to steer consumers tocertain insurers. Consumers thus may not end up with the plan that would best meet theirneeds. Moreover, insurers with significant market share can use DE and EDE to maintaintheir dominance, making it harder for small insurers or new entrants to compete.

One web broker lists what appears to be a complete list of plans (“17 of 17”) available in a rating area but in reality covers only about one-third of the available plans.

Not all DE entities have all these problems, but the DE program lacks safeguards to protect consumers from harm. And despite evidence that DE already poses risks to consumers, a recent Trump Administration proposal would expand DE further by allowing application assisters and navigators to enroll consumers using a DE pathway instead of the marketplace. These changes are consistent with the Administration’s larger effort to privatize more marketplace functions and reduce the resources, public presence, and capacity of the marketplaces themselves.

The Evolution of Direct Enrollment The ACA created health insurance exchanges, now often called marketplaces, that are operated by

the federal government or a state. It requires them to perform a number of functions, including certifying qualified health plans (QHPs) that meet all ACA standards, providing a website where consumers can compare QHPs, offering tools such as an online calculator to help people

1 All web broker examples are from entities listed as registered web brokers as of July 2018. Center for Consumer Information & Insurance Oversight (CCIIO), memo, July 2018 Web-broker Public List, July 2, 2018, https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/Downloads/Public-WBE-List.pdf. All of these web brokers also sold marketplace plans in 2019 but not all are listed on the CCIIO private partner enrollment list, which is only a partial listing. CCIIO, “Private Partner Enrollment and Client Management Capabilities for Agents and Brokers,” January 3, 2019, https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/Private-Partner-Enrollment.html. All examples were captured between November 1, 2018 and February 13, 2019.


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understand their cost for coverage, operating a telephone call center, and establishing a navigator program to provide consumers with impartial help.2 Marketplaces can only offer QHPs, not other plans that fail to meet ACA standards. They are the only entities that can determine eligibility for ACA subsidies available to people enrolled in a QHP. Also, under the ACA’s “no wrong door” policy, the marketplaces can connect Medicaid- or CHIP-eligible people with those programs. The marketplaces (HealthCare.gov and the state-specific marketplaces for states that don’t use HealthCare.gov3) are a single place for consumers to get impartial information about and enroll in coverage that meets the ACA’s standards and their own health needs.

From the beginning of the marketplaces, agents and brokers (including web brokers) and insurance companies have helped people enroll in marketplace plans and apply for subsidies. Under the ACA, a state may permit agents and brokers to “enroll individuals and employers in any qualified health plans in the individual or small group market … through an Exchange” and “assist individuals in applying for premium tax credits and cost-sharing reductions for plans sold through an Exchange.”4 Brokers must comply with federal regulations that outline their obligations in enrolling qualified individuals and helping them apply for financial assistance, including registering with the marketplace, complying with state licensure standards, receiving training, and complying with privacy and security standards.

Under direct enrollment, a consumer typically visits a DE entity’s website and is screened for eligibility for financial assistance. (If the consumer is working with an agent or broker that uses a DE site, the broker provides the information on the consumer’s behalf.) If the consumer is likely eligible for marketplace subsidies based on the initial screening and wishes to proceed, she is electronically handed off to the marketplace to complete the official application and receive the official eligibility determination; she then returns to the DE portal to select a plan and enroll. (In some web portals, consumers select a plan after the initial screening but before completing the official application at HealthCare.gov.) Brokers say this transfer from the DE portal to the marketplace and back again, sometimes called a “double redirect,” is cumbersome and frustrates consumers, causing many to discontinue the application.

To address these and other concerns, the federal Center for Consumer Information and Insurance Oversight unveiled enhanced direct enrollment beginning in the 2019 plan year.5 The EDE option allows certified entities to collect all application information through their websites, submit the application to the marketplace, and then retrieve the marketplace’s official eligibility determination; the consumer never interfaces with HealthCare.gov. The EDE entity can also help consumers with post-enrollment issues, such as responding to notices and submitting documents to verify eligibility

2 For a full list of exchange functions and requirements, see Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 1311 (2010), amended by Health Care and Education Affordability Act, Pub. L. No 111-152 (2010). 3 The direct enrollment rules apply to both the federally facilitated and state-based marketplaces, subject to state law. This paper focuses on HealthCare.gov. 4 § 1312(e) 5 In plan year 2018, another form of direct enrollment, called proxy direct enrollment, was available. Proxy direct enrollment entities avoided the “double redirect” by hosting the HealthCare.gov application directly on their website. Consumers enrolling through proxy direct enrollment still needed to go to HealthCare.gov to create an account, make changes to their enrollment, and receive notices.


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without going to the marketplace website. EDE’s stated goals are to give consumers more ways to shop for coverage, encourage them to complete the application process, and incentivize brokers to keep clients connected to marketplace coverage.

Dozens of entities are approved to conduct direct enrollment, and nine are approved to conduct EDE.6 Use of direct enrollment has grown: agents and brokers facilitated 42 percent of HealthCare.gov enrollments for the 2018 plan year, and 39 percent of those enrollments came through direct enrollment.7

Concerns About Direct Enrollment and Enhanced Direct Enrollment While offering multiple avenues to enroll in marketplace coverage has certain benefits, DE and

EDE lack the protections the ACA marketplace provide, exposing consumers to various risks.

Many Web Brokers Have Financial Incentives to Sell Substandard Plans

The marketplace’s qualified health plans must follow the ACA’s individual market rules. They cover comprehensive benefits and can’t deny coverage or charge higher prices to people with pre-existing conditions. A few DE entities exclusively sell qualified health plans, but most also sell other health products such as short-term health plans, fixed-indemnity plans, and health care sharing ministries.8 Such non-ACA plans often are not in the consumer’s best interest. They can reject or charge higher premiums to people with pre-existing conditions; charge more based on age, gender, or any other factor; impose lifetime and annual benefit limits; require cost-sharing of any amount; and leave out ACA essential health benefits. For example, Kaiser Family Foundation research found that no short-term plans offered through two major web brokers covered maternity care and fewer than one-third covered prescription drugs.9

In addition, the average short-term plan in 2017 spent less than 65 percent of premium dollars on medical care, with the remainder going to profits and overhead, compared to at least 80 percent for ACA-compliant individual market policies, according to research from the National Association of Insurance Commissioners. The three largest insurers offering short-term coverage spent even less on medical care: 44, 34, and 52 percent.10

6 CCIIO, “Private Partner Enrollment and Client Management Capabilities for Agents and Brokers”; Partners Approved to Use Enhanced Direct Enrollment, CCIIO, March 11, 2019, https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/Downloads/EDE-ApprovedPartners.pdf. At least six of the nine EDE entities use the platform developed by Health Sherpa. 7 Katie Keith, “CMS Posts New Info on Role of Agents and Brokers in 2018 Open Enrollment,” Health Affairs blog, January 19, 2018, https://www.healthaffairs.org/do/10.1377/hblog20180119.425761/full/. 8 Fixed-indemnity plans provide a limited, pre-determined cash benefit for covered illnesses or injuries; health care sharing ministries are non-insurance arrangements in which members pay dues and share medical costs. 9 Karen Pollitz et al., “Understanding Short-Term Limited Duration Health Insurance,” Kaiser Family Foundation, April 23, 2018, https://www.kff.org/health-reform/issue-brief/understanding-short-term-limited-duration-health-insurance/. 10 Katie Keith, “The Short-Term, Limited-Duration Coverage Final Rule: The Background, The Context, and What Could Come Next,” Health Affairs blog, August 1, 2018, https://www.healthaffairs.org/do/10.1377/hblog20180801.169759/full/.


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Despite their serious drawbacks for consumers, non-ACA plans tend to pay high commissions to agents and brokers, including web brokers.11 Short-term plans pay commissions of close to 20 percent, compared to 5 percent for a typical ACA-compliant plan, according to eHealth.12 Commissions in the marketplace have declined, and many QHPs pay no commissions at all.13

Direct enrollment entities can use their websites to steer enrollees into these higher-commission

products. For example, the navigation drop-down menu on eHealth’s landing page (www.ehealthinsurance.com/) offers “Health Insurance” as the default; selecting “Health Insurance” will typically display short-term and fixed-indemnity plans and bypass qualified health plans altogether in most cases.

If the consumer instead selects “Obamacare Coverage” (the fifth of the eight product options),

only QHPs are displayed. This is consistent with federal regulations: a DE entity must display QHPs on a separate page from non-QHP products, and once the consumer begins QHP plan selection, non-QHP plans or non-QHP ancillary products (like vision or accident coverage) can’t be marketed until the consumer concludes plan selection.14 However, even on eHealth’s QHP selection page, diversions are still possible. For example, a chat box automatically opens, where a company representative can answer questions on ACA-compliant coverage but may also recommend a short-term or indemnity plan. Separately, clicking the “Get Recommendations” link on the page generates a pop-up box asking whether the consumer needs longer- or short-term coverage (see Figure 1); consumers who select short-term coverage and indicate no pre-existing medical conditions are directed to short-term plans, while people with health conditions are directed back to the marketplace plan selection page. This dynamic raises marketplace premiums over time by luring healthier people away from the individual market and into short-term plans, leaving a costlier group behind.15

11 Kevin Lucia et al., “Views From the Market: Insurance Brokers’ Perspectives on Changes to Individual Health Insurance,” Urban Institute, August 2018, https://www.rwjf.org/content/dam/farm/reports/issue_briefs/2018/rwjf447745. 12 Margot Sanger-Katz, “What to Know Before You Buy Short-Term Health Insurance,” New York Times, August 1, 2018, https://www.nytimes.com/2018/08/01/upshot/buying-short-term-health-insurance-what-to-know.html. 13 Virgil Dickson, “Thousands of Brokers Exit HealthCare.gov as Plan Commissions Go Unpaid,” Modern Healthcare, April 5, 2017, https://www.modernhealthcare.com/article/20170405/news/170409972. 14 45 C.F.R. §155.220, 221. See Centers for Medicare & Medicaid Services, Federally-facilitated Exchange (FFE) and Federally-facilitated Small Business Health Options Program (FF-SHOP) Enrollment Manual, June 26, 2018, https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/Enrollment-Manual-062618.pdf. 15 Sarah Lueck, “Key Flaws of Short-Term Health Plans Pose Risks to Consumers,” Center on Budget and Policy Priorities, September 20, 2018, https://www.cbpp.org/research/health/key-flaws-of-short-term-health-plans-pose-risks-to-consumers.


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FIGURE 1

Brokers May Use Consumers’ Information to Target Them for Substandard Plans

Some screening tools on DE web brokers’ sites gather information that is irrelevant to enrollment in a QHP, potentially to determine whether to target them for a non-ACA plan based on their health status or other characteristics. DE web brokers often have a screening tool on their landing page that gathers information that can factor into the cost of marketplace coverage, such as age, family composition, income, and tobacco use. But in some cases, the broker also asks about health conditions, prescription drugs, height and weight, gender, or other factors that could be used for underwriting purposes to enroll a person in non-ACA coverage. Several DE entities are lead-generating websites that pass this information to brokers for phone solicitations, where there is no firewall between the sale of QHPs and non-ACA plans. Brokers can use aggressive marketing tactics, encouraging consumers to enroll in a short-term plan while giving them only the barest information about it.16

Consumer information can also be used beyond the initial insurance inquiry. The web broker

iWebQuotes collects name, phone, and address information, along with health conditions, gender, height, and weight. To receive a plan quote, the consumer must agree to a disclaimer and consent “to receive marketing & telemarketing contact via automatic telephone dialing system, artificial/pre-recorded messages, email, and text message from insurance companies, insurance agents, the owner of this website, and partner companies.” (See Figure 2.)

In addition to the data the consumer enters on the web form, other information, like browser

tracking data, is presumably gathered and sold. This could include: the websites consumers visit, for

16 Sabrina Corlette et al., “The Marketing of Short-Term Health Plans: An Assessment of Industry Practices and State Regulatory Responses,” Urban Institute, January 2019, https://www.urban.org/research/publication/marketing-short-term-health-plans-assessment-industry-practices-and-state-regulatory-responses.


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how long, and in what sequence; search queries; purchases; device information; location; when, where, and how many times they’ve seen previous advertisements; and what links they click on. Based on this data, a consumer may see targeted advertisements for alternative plans or receive phone solicitations now and in the future, including during the next open enrollment period.

FIGURE 2

The cumulative impact of allowing or even encouraging consumers to buy underwritten and substandard plans via DE entities ultimately could harm the stability of the marketplaces and their enrollees. If healthier people enroll in substandard coverage, the population left in marketplace coverage will be sicker, on average, which could raise QHP premiums and destabilize the market.

Some Brokers Steer Medicaid-Eligible People Away From Single, Streamlined Application

The ACA’s “no wrong door” policy enables consumers seeking coverage at the marketplace to complete a single, streamlined application to determine eligibility for and enroll in Medicaid, CHIP, or marketplace coverage. Consumers don’t need to navigate multiple agencies and systems to secure the coverage each family member is eligible for. DE, however, can interfere with the “no wrong door” policy by failing to notify very low-income adults that they or their children may be eligible for Medicaid or CHIP and instead trying to sell them private plans. The likely outcome is to


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discourage consumers from beginning the single, streamlined application, causing some people to enroll in less comprehensive, less affordable private plans or to remain uninsured.

Many web brokers ignore consumers’ potential Medicaid eligibility altogether unless at least one

household member is eligible for subsidized marketplace coverage. For example: • Presented with a family in Pittsburgh, Pennsylvania, with a $15,000 household income (91

percent of the federal poverty line for 2019 coverage), Value Penguin (www.ValuePenguin.com) displays high-deductible, unsubsidized plans starting at $424 per month, with no indication that both the 31-year-old parent and 6-year-old child are likely eligible for Medicaid. The same family in Huntsville, Alabama, sees plans starting at $552 for coverage that includes the child, who is likely eligible for Medicaid. (Because Alabama has not expanded Medicaid, the parent is in the Medicaid coverage gap, with an income too high for Medicaid but too low to qualify for the ACA’s premium tax credit.)

• Get Insured (www.GetInsured.com) correctly identifies a Houston child as Medicaid eligible when her parent is screened as eligible for a premium tax credit at household income of $20,000 (122 percent of the federal poverty line for 2019 coverage). However, if the same parent is in the Medicaid coverage gap, with household income of $15,000, the site doesn’t note the child’s likely eligibility for Medicaid or CHIP. Instead, it tells the consumer, “Oh no! It looks like you may not be eligible for tax credits,” and displays full-cost plans with a premium that includes both parent and child, starting at $431 per month. (See Figure 3.)

• Similarly, eHealth shows a Virginia family with income of $15,000 an array of unsubsidized plans along with this message: “Your household income doesn’t seem to qualify for a subsidy. However, when you apply for a plan on this page you will complete an official subsidy application to check if you actually do qualify for a subsidy.” It doesn’t mention that both the parent and child are eligible for Medicaid in Virginia, an expansion state. The site displays the same message for the same family in Oklahoma, where the parent is in the coverage gap but the child is Medicaid eligible.


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FIGURE 3

At these web broker sites, with no indication that a household member likely qualifies for

Medicaid, no link to HealthCare.gov or the state Medicaid agency, and a prohibitively high unsubsidized premium, a low-income parent is unlikely to begin applying.

As noted, once a consumer enters a QHP selection pathway, non-QHPs cannot be marketed until

the consumer exits the QHP selection page; but no similar prohibition applies to marketing to Medicaid-eligible consumers. For example, after correctly identifying a consumer as likely eligible for Medicaid through its screening process, eHealth suggests that he purchase a short-term, limited-duration or telemedicine policy “while you wait for a decision from your state’s Medicaid authority.” Consumers who apply for a short-term plan — or even visit that page of the website — would likely receive a significant marketing push for those plans, whether or not they later enrolled in Medicaid.

In other cases, web brokers use sleight of hand to move Medicaid-eligible consumers into other

types of plans. Florida Blue (www.FloridaBlue.com) tells a family that is not eligible for a tax credit (because the parent is in the coverage gap and the child is Medicaid eligible), “This means you can buy a plan direct from Florida Blue.” Even though the site flags the child as eligible for Medicaid, it provides no link to HealthCare.gov or the state’s Medicaid agency to apply for Medicaid. Instead, it displays a menu of unsubsidized plans and automatically includes the Medicaid-eligible child in the premium if a consumer selects a plan.

In another example of misdirection, eHealth’s “Health Insurance” screening tool correctly

identifies a subsidy-eligible consumer with a Medicaid-eligible child. But if the consumer checks a box to confirm that the Medicaid-eligible child should not be included in the price quote and hits


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“Continue Shopping” directly beneath the box, she is quickly diverted to non-compliant plans. (See Figure 4.) FIGURE 4

In short, in sharp contrast to the marketplace’s “no wrong door” approach, some web brokers

have many wrong doors. Consumers could easily be confused about the different types of plans and their eligibility for Medicaid or subsidies. Misdirection could be even more consequential when consumers use EDE and are not brought back to HealthCare.gov to complete their application and eligibility determination.

DE Stifles Meaningful Competition Among Marketplace Plans

The marketplace is a one-stop shop for health plan enrollment. Consumers can go to one website to see every marketplace plan available to them, along with premium and cost-sharing information, the discounts available through premium and cost-sharing subsidies, provider directories, and other comparative information. Any carrier that meets the standards can have its plans displayed, even if it has a small advertising budget or market share.


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DE is supposed to simplify the consumer shopping experience but instead makes it harder; consumers don’t know which online brokers are registered to sell marketplace plans or whether a given broker displays all or only some of the available plans, and they (unknowingly) will see different plan options depending on which web broker or issuer they choose. For the 2019 plan year, for example, the Centers for Medicare & Medicaid Services (CMS) didn’t make a directory of approved DE issuers and web brokers public until December 13, two days before open enrollment ended.17 Even then, the directory acknowledges that “[n]ot all approved partners have provided CMS with information to display here.”18 For example, eHealth isn’t listed, even though it sold marketplace plans and its U.S. Securities and Exchange Commission filing indicates that it is a direct enrollment entity.19

Even at an approved DE entity, comparing plans can prove difficult. Insurers that are approved

to use DE display only their own products and exclude other marketplace offerings entirely, with a disclaimer directing shoppers to HealthCare.gov for the full list of plans. Web brokers are technically required to display all plans, but the plan information they must show is minimal — only the QHP issuer’s contact information, the plan name, type, metal tier, and state. Brokers do not have to display premiums and deductibles or a host of other information consumers need, as long as a standardized disclaimer directs consumers to HealthCare.gov for more information.

Federal rules also give web brokers plenty of leeway to show certain plans (such as those that pay

commissions) more prominently. It’s permissible, for example, for a web broker to display plans that pay commissions with full-color logos and premium and cost-sharing information, while simply listing other carriers’ plans in plain text at the bottom of the page. In another example, beside each plan eHealth is required to list but doesn’t earn a commission selling, a button encourages the consumer to call an eHealth agent. A consumer may expect to get more information about the plan if they call, but since those plans don’t pay a commission, an agent won’t have any plan details, not even the premium, and can instead press the consumer to enroll in commission-paying QHPs and non-compliant plans, without being constrained by the bright-line marketing restrictions on plan display. Web brokers can also let the compensation they receive from plans determine the plan recommendations they make to consumers.20

Consumers are likely to be confused by their plan options. For Duval County, Florida, for

example, eHealth displays what it calls “17 of 17 plans.” (See Figure 5.) Consumers may assume this is a complete list of their options, but listed in plain text at the bottom of the screen are 32 additional plans from Florida Blue, all without the premium or cost-sharing information needed to 17 New Directory for Agents and Brokers, email from HealthCare.gov, December 13, 2018, https://content.govdelivery.com/accounts/USCMSHIM/bulletins/21e1baa. 18 CCIIO, “Private Partner Enrollment and Client Management Capabilities for Agents and Brokers.” 19 eHealth, Inc., Preliminary Prospectus Supplement, Exhibit 99.1, Form 8-K, January 22, 2019, https://www.sec.gov/Archives/edgar/data/1333493/000162828019000485/selectedportionsoftheregis.htm. 20 A provision in the Notice of Benefit and Payment Parameters would prohibit web brokers from making recommendations based on compensation but would still permit them to “implicitly recommend QHPs based on compensation they receive by listing those that are not offered by issuers with whom they have contractual agreements at the bottom of the listings of all QHPs offered through the Exchange.” Federal Register, January 24, 2019, p. 275, https://www.federalregister.gov/documents/2019/01/24/2019-00077/patient-protection-and-affordable-care-act-hhs-notice-of-benefit-and-payment-parameters-for-2020.


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make a meaningful comparison. The same consumer could go to Florida Blue’s website and find pricing for those plans, 15 of which are cheaper than the lowest-cost plan on eHealth but not even a plain-text listing of the competing plans. A trip to Health Sherpa (www.healthsherpa.com) would list all 49 plans, as HealthCare.gov does. Without visiting multiple websites, consumers would have difficulty finding and comparing their plan options; they won’t know what financial considerations drive web brokers to preference some plans over others, and some could mistakenly assume the distinctions reflect the plans’ relative quality. This is the type of fractured shopping experience the marketplace is designed to remedy.

FIGURE 5

Reverting to the disjointed shopping experience consumers had prior to the ACA also limits the marketplace’s ability to lift up smaller or newer health plans. One significant barrier to market entry, even for established insurers entering a new state, is the name recognition and pricing influence of the dominant insurer. Receiving equal treatment in the marketplace can help new insurers gain their footing without substantial up-front marketing and commission spending. Direct enrollment foils this in two ways. First, an insurer may need to pay substantial commissions to brokers to appear on web broker platforms and compete with the dominant plan. Second, a dominant insurer can become a direct enrollment entity itself and drive enrollees directly to its own platform instead of


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the marketplace — initially and in plan renewals — so potential enrollees never even see other QHP options.

Enhanced direct enrollment could have an even more anti-competitive result than DE. Not only

will a bevy of web brokers highlight only their preferred plans, but since consumers aren’t directed to HealthCare.gov at any point, they are less likely to see the full array of available plans.

DE Reflects Administration Efforts to Privatize Marketplace Functions

Direct enrollment puts barriers between the consumer and the marketplace by delegating the plan shopping experience to private (and self-interested) entities. Enhanced direct enrollment goes further, fully erasing HealthCare.gov from the consumer’s experience. The increased privatization of marketplace functions has serious consequences for consumers and the marketplace.

The marketplace is a single-stop platform designed to serve every consumer and demystify

shopping for health plans, particularly for low- and moderate-income consumers, many of whom have never shopped for private coverage. It has developed tools, such as help text and glossaries, that have undergone extensive public input, and it meets certain federal requirements to assist people with limited English proficiency and people with disabilities.

Privatizing core marketplace functions through direct enrollment makes shopping considerably

harder for consumers who want comprehensive information to compare all their plan options. While one justification for DE is the innovation that private web brokers could bring to the shopping experience, most brokers don’t compare with the marketplace’s robust tools, which enable consumers to sort plans according to anticipated yearly cost, search provider directories, check coverage of prescriptions, and easily navigate to full plan information. A consumer visiting DE entity websites might have to shift among several sites to get a complete menu of the available plans or to eventually apply for Medicaid. EDE’s elimination of the “double redirect” may smooth out one part of the consumer shopping experience, but direct enrollment’s fundamental flaws greatly complicate the tasks of comparing plans and making a selection. Privatization of marketplace functions also encourages insurers to compete on web broker sites on the basis of commission and advertising money instead of objective plan features — something the marketplace was designed to remedy.

Some have suggested expanding the use of private direct enrollment pathways and replacing the

marketplace altogether.21 The Trump Administration is moving in that direction. It has cut marketplace outreach funding by 90 percent since 2016 and navigator funding by more than 80 percent; and the Department of Health and Human Services’ (HHS) navigator funding awards now favor entities that are willing to recommend short-term plans and other non-ACA plans to consumers.

21 Jennifer Steger, Rundell Douglas, and Joel White, “2018 Health Insurance Exchanges: Progress Made, but Time to Say Goodbye?” Council for Affordable Health Coverage, October 2018, https://www.cahc.net/newsroom/2018/10/29/new-report-highlights-shortcomings-on-healthcaregov-state-based-exchanges-ahead-of-open-enrollment-season.


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While scaling back impartial assistance, the Administration is actively promoting the use of agents and brokers. In the third week of open enrollment, HealthCare.gov’s “Apply for Health Insurance” page was altered to promote the option of using an agent or broker over other methods, such as enrolling directly or with the help of an assister.22 In another example, HHS’s proposed payment parameters rule for 2020 encouraged navigators to “evolve” and would have newly allowed them to enroll consumers through web brokers instead of the marketplace.23 It also would further reduce funding available to support navigators and other marketplace operations by reducing the user fees paid by health plans. Reducing funding and outsourcing core marketplace functions could compromise in-house expertise, even as the marketplace will be asked to serve the consumers with the most complex situations, whom most direct enrollment entities can’t or won’t help.

Direct enrollment often harms, not helps, consumers. It could raise marketplace premiums by

undercutting the ACA’s market reforms if the consumers with the most favorable health profiles are cherry-picked from among marketplace enrollees. Consumers can be misled into enrolling in substandard plans or not enrolling at all, even if they are eligible for Medicaid or subsidized comprehensive insurance, and can be confused by private websites that purport to offer marketplace coverage but do so selectively and subject to their own financial considerations.

22 Sunlight Foundation, “Overhaul of HealthCare.gov’s ‘Apply for Health Insurance’ Webpage,” December 10, 2018, http://sunlightfoundation.com/wp-content/uploads/2018/12/CCR-16-HealthCare.gov-Ways-to-Apply-Page-181210.pdf. 23 Federal Register, p. 273. The proposal was not finalized. Federal Register, April 25, 2019, p. 17521, https://www.govinfo.gov/content/pkg/FR-2019-04-25/pdf/2019-08017.pdf.


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Approaches State Insurance Departments Can Employ for Consumer Input When Designing Consumer Education, Information & Disclosures

Karrol Kitt and Brenda Cude, NAIC Consumer Representatives NAIC Consumer Liaison Committee, August 5, 2019

Consumer testing is the gold standard for seeking consumer input when designing effective consumer education, information and disclosure delivered online, via apps, and in print. The 2012 NAIC Best Practices and Guidelines for Consumer Information and Disclosures includes a brief but useful section about consumer testing. While the NAIC consumer representatives strongly encourage consumer testing when feasible, we also recognize that it isn’t always practical. In this presentation, we offer ideas about ways insurance departments can get feedback from consumers without formal consumer testing and share responses from a survey of 20 state insurance departments.

How might NAIC more fully engage in this topic? The NAIC Market Regulation and Consumer Affairs Committee has requested comments on the Best Practices and Guidelines for Consumer Information Disclosures paper. We encourage the NAIC to update this paper to include, among other improvements, both more information about consumer testing but also ideas about other ways NAIC and insurance departments can engage with consumers when designing consumer education, information, and disclosures.

Contact:

Karrol Kitt, [email protected]

Brenda Cude, [email protected]

Attachment Three Consumer Liaison Committee

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mailto:[email protected]

mailto:[email protected]

NAIC Consumer Liaison Presentation Engaging Consumers To Design Consumer Information Brenda Cude & Karrol Kitt August 5, 2019

The question: Has your department reached out to insurance consumers as a part of the process of designing consumer information, education, and/or consumer disclosures? 5 states responded yes

State Actions Taken What Was Learned

California We convened several focus groups to learn best ways to publicize our programs. The attendees were compensated to participate in group interviews at a specific location and provided feedback to questions and photos.

Learned who they would trust, what would attract their attention, how they felt about the program, and their thoughts on cost.

District of Columbia

The District of Columbia Department of Insurance, Securities and Banking conducted a web survey in the fall of 2018 that included consumers. The survey was distributed by email and posted on the Department’s website so that all visitors could participate. The intent of the survey was to invite feedback on, and evaluate, the information/content (including insurance information), design and navigation of the site. DISB also holds numerous presentations throughout the District each year on topics that include homeowner’s and renter’s insurance. At the end of each presentation, participants answer a survey that asks them to evaluate the presenter and the content of the presentation. Consumer materials and presentations are revised based on feedback received from the surveys.

Key recommendations for the website based on survey results included: Reorganizing information on the website; Improving content and content organization of licensing-related matters; Improving Searches by using more relevant keywords; Using videos to explain each program’s function on each page; Updating the site more regularly; Adding FAQs. Community presentation survey results showed that consumers would like more information on ways to file a complaint (insurance related and otherwise) and other services and programs that DISB provides.

Texas

We asked for volunteers for a “virtual focus group” through our social media accounts and website. About 100 people responded. We send drafts of our consumer materials to this group and use their feedback to make changes. Of course, our focus group is people who were already looking at our information – so not really reflective of the average insurance consumer. We consider this a first step in our effort to get more direct consumer feedback on our material

We posted a story on our focus group recently that includes examples of the changes we’ve made in materials based on the group’s feedback. //www.tdi.texas.gov/news/2019/tdi05292019.html


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Pennsylvania

We’ve worked with advocacy groups and PA Library Association to create our health insurance literacy videos (www.insurnace.pa.gov/literacy) and other written materials. We’ve also worked with AARP and Libraries for education for seniors. The PA Libraries have been a good partner with feedback on other presentations, auto, homeowners etc. We also worked with AAA to get information to senior drivers about mandatory discounts available if drivers take approved safety courses. The insurance commissioner also attended a first-time homebuyers seminar sponsored by NeighborWorks NEPA to introduce a brochure on how to access the CLUE report on the home the consumer is considering buying, to see if any homeowners’ insurance claims were filed in the previous seven years. The health insurance literacy videos were part of the health insurance literacy workgroup that we lead. The workgroup includes providers, insurers, advocacy groups, other state agencies and the library association. Partnering with the libraries allows us a good opportunity to reach Pennsylvanians directly. The insurance commissioner presented certificates to seniors who completed the senior driving classes. These certificates are sent to the insurance companies to verify the driver is to get the mandatory five percent discount.

That our initial work product was written and too high a reading level and had too much insurance jargon. As insurance professionals, we tend to forget that consumers aren’t.

Washington

The WAOIC takes a user-centered methodology to designing our website and online information to ensure consumers can find what they need and understand what they read. The WAOIC’s Web Service’s team plans and conducts task-based web usability testing on our online consumer information. We conduct the tests at a state-owned web usability testing lab and typically recruit 8-10 participants who are asked to complete 10-12 tasks. We observe, record, and document, how well the participant can complete each task and understand the information. The test data is analyzed and recommendations are developed based on the findings. Each study costs about $3,000 for the testing lab facility and participant requirement. We also use analytic tools such as Google and crazyegg to gain insights on how well our website consumer information is performing, track user behavior and test improvements. We also strive to ensure our online consumer information is written in plain language and follows the writing for the web best practices.

One of the benefits of conducting usability testing is not only being able to test how easy consumers can get their questions answered but, also gain insights into their insurance buying needs and perceptions of our agency. Also, during usability testing participants are encouraged to speak out loud as they complete the tasks and their comments often help us understand what terminology they use. Sometimes just a small change in terminology can have a big impact on making consumer information more user-friendly.


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http://www.insurnace.pa.gov/literacy


The question: Has your department reached out to insurance consumers as a part of the process of designing consumer information, education, and/or consumer disclosures? 12 states responded no, including Florida, Nebraska, Nevada, North Carolina, and Tennessee. The states listed below provided more information.


Louisiana

While the LDI does not have a specific program whereby we engage insurance consumers in the design of consumer information, education and/or consumer disclosures, the LDI does have a proactive process that we utilize in this area. Each LDI staff person or office that is tasked to make a presentation to a public group is expected to elicit comments from the members of that public group regarding the effectiveness of the presentation. In general, the vast majority of feedback comments from the public encourage the LDI to look at readability, providing definitions to all terms (especially insurance terms) used in the presentation, and make it clear that the use of “plain language” is critical to positive consumer understanding. The section of the LDI that is perhaps the most proactive in this arena is our Senior Health Insurance Program (SHIP) because they make numerous presentations to groups and senior citizens each month. As such, the SHIP utilizes this process and has determined that it is very effective in allowing them to evaluate and make positive changes to the presentations that the SHIP makes to the public. Additionally, the LDI office/staff that is preparing a power point or a speech or a brochure will work closely with the LDI Division of Public Affairs and our Public Information Office (PIO) in the drafting, modification, and final preparation, as well as the constant re-evaluation, of any such document/presentation that will be used to disseminate consumer information, educate consumers and/or provide consumers with disclosures about various insurance matters/issues that affect the insurance buying public. As such, the LDI Division of Public Affairs and our PIO is a key component that guides how the LDI ensures that all consumer information, education, and/or consumer disclosures meet the standards that they have determined will ensure the highest degree of readability and understanding by insurance consumers.

The most valuable thing that the LDI has learned is that it is critical to constantly evaluate our print and digital publications for accessibility, readability and understandability. It is only through a process of constant evaluation that the LDI can maximize consumer information, education and/or consumer disclosures so that the LDI can increase consumer knowledge, understanding and confidence in the insurance arena.


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Maine

time our staff can remember working with consumers on our outreach publications or on proactive preparation of consumer disclosure requirements was when we developed our Consumer Guide to Individual Health Insurance in 2013, when we consulted with Consumers for Affordable Healthcare, a local consumer advocacy group. We haven’t done our own consumer focus groups to anyone’s knowledge. However, our PIO noted that we rely heavily on the NAIC and the work they do with consumer feedback.

The reason I qualified my response by saying “proactive” preparation of consumer disclosure requirements is that we do get belated consumer input if there’s a complaint that highlights weaknesses in the system. For example, working with XXXX on improving disclosures for their “landing spot” alternatives to long-term care insurance rate increases after we got complaints from policyholders (through their agent) that the disclosure was ambiguous and they didn’t realize how much of their inflation benefit they were giving up. We worked with them to redesign the disclosure’s ambiguities, and all affected consumers had a second chance to take either the rate increase or a different landing spot option.

Missouri

The Missouri DIFP has not done any formalized outreach to consumers related to designing consumer materials. Informally, we rely upon on our non-technical staff to provide input on occasion. We would be limited in terms of actual consumer testing due to budget constraints. We do rely heavily on the work done through the NAIC which usually does solicit feedback from consumer representatives and the public. Angela Nelson, Chair of Consumer Information Subgroup and Transparency and Readability, was involved with consumer testing of the SBC health coverage document that the NAIC funded in 2015.

With regard to the consumer testing of the SBC funded by the NAIC, we observed that while the general concepts of cost-sharing were familiar, the lack of comprehension in being able to apply the most basic of cost-sharing features, like deductibles, was significantly lacking.

New Mexico

In the past, our Consumer Affairs, Legal and/or fraud would receive enough questions/concerns about a certain topic that we would use to develop a consumer alert or brochure….air ambulance, health care sharing ministries, fraudulent attempts on annuity funds, resources for flood victims, etc. In addition, we listen closely to the consumer representatives at the NAIC to better understand the current concerns and viewpoints.


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“No” State Actions Taken What Was Learned

Oregon

At this time our agency is not conducting any outreach for consumers. We have in the past, however I know that we all understand the budget process and what functions are the first to go. At the time we were conducting outreach, we would sign up for different events around the state. We would set up booths with flyer information about OSI, and have consumer complaint forms available. The biggest part of the events was the face to face contact and discussions held with the public. Some of our difficulties were that people thought we were trying to sell insurance and would stay away from the booth for that reason.

We use an Advisory Committee in some outward facing messages, and we have used focus groups, in the past (but not currently). We also do A/B testing with our paid social media posts and also some consumer user testing on our website.

Rhode Island

Currently, we do not engage in the consumer outreach outlined in question #1 below; we just don’t have the resources to do it. (Frankly, we rely on the NAIC to provide most of our content we use for consumer outreach.)

Wisconsin

We have not done much of this to date, but we plan on making consumer outreach a central piece of our public education/engagement efforts going forward. We are in the process of following a “nothing about us without us” philosophy regarding outreach, wherein we are actively seeking feedback from impacted stakeholders so that we can design materials that will be readable, relevant, and responsive to the groups they are targeted towards. Moving forward, we hope to sit down with consumers to understand what issues they see in the insurance world so we can understand what they’d like more information on, as well as how it should be presented.

Obviously to be determined, but we are optimistic that these efforts will allow us to produce more engaging and easily readable content.

Rhode Island

Currently, we do not engage in the consumer outreach outlined in question #1; we just don’t have the resources to do it. (Frankly, we rely on the NAIC to provide most of our content we use for consumer outreach.)

Wisconsin

We have not done much of this to date, but we plan on making consumer outreach a central piece of our public education/engagement efforts going forward. We are in the process of following a “nothing about us without us” philosophy regarding outreach, wherein we are actively seeking feedback from impacted stakeholders so that we can design materials that will be readable, relevant, and responsive to the groups they are targeted towards. Moving forward, we hope to sit down with consumers to understand what issues they see in the insurance world so we can understand what they’d like more information on, as well as how it should be presented.

Obviously to be determined, but we are optimistic that these efforts will allow us to produce more engaging and easily readable content.

No-Response from Idaho, Mississippi, New York


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January 2013 | CIPR Newsle er

We are pleased to provide the latest issue of the Center for Insurance Policy and Research (CIPR) Newsletter. Our goal is to provide thought leadership and information for an audi-ence including U.S. and international regulators, state and federal policy makers, lawmak-ers, academics, researchers and consumers on the latest regulatory activities and key issues, trends and risks that affect the insurance industry. We want to provide you with insight into the major challenges that face the regulatory community and to promote a greater under-standing of a wide range of national and international developments in the insurance world.

This issue includes nine articles we hope are of great interest to our readers. We begin with a timely discussion of health insurance reform. Brian Webb, NAIC Health Policy Team Man-ager, addresses some of the frequently asked questions for consumers and employers about the new health insurance reform legislation.

David Keleher, NAIC Senior Property and Casualty Insurance Specialist, discusses workers’ compensation self-insurance and the implications of the Prime Tanning bankruptcy case. The bankruptcy case contained several features that could have overturned state workers’ compensation law and damaged the ability of the states to regulate workers’ compensation self-insurance

Reggie Mazyck, NAIC Life Actuary, writes about Principle-Based Reserves (PBR). The NAIC recent adoption of the Valuation Manual is the first major step in the move to PBR and likely marks the beginning of a new era of life insurance regulation. Sara Pankow, NAIC Research Analyst, provides a comprehensive overview of crop insurance and discusses key issues such as the summer-long drought which caused extensive damage to crops last year. The NAIC Research and Actuarial Department provides data at a glance. This quarter we take a look at market concentration and profitability for several property/casualty lines of business.

I contribute two articles to this edition. The first article explores the early stages of the self-driving car and looks at some possible insurance issues that may arise. The second article discusses the considerable efforts by a number of parties working together to make responding to a disaster possible and how Insurance regulators play key roles in several areas.

This edition also features two articles from invited authors. The first article, written by Sebastian von Dahlen and Goetz von Peter, examines catastrophe-related losses over the past three decades, and explores the linkages that arise in the transfer of risk from policyholders all the way to the ultimate bearer of risk. The second article, written by Brenda J. Cude and Daniel Schwarcz, discusses the importance of effective disclosure of complex financial products and outlines specific recommendations for designing disclosures in insurance.

I hope you enjoy the Newsletter. Your comments and suggestions for improvement are always welcome .

Eric Nordman CIPR Director

JANUARY 2013

http://cipr.naic.org

Insidethisissue

Frequently Asked Ques ons about Health Insurance Reform .................................. 2

Are We Ready for Self-Driving Cars? .................................... 5

Workers Compensa on Self-Insurance and Possible Implica-

ons of the Prime Tanning Bankruptcy Case ................... 7

The Future of Life Insurance Regula on—Principle-Based Reserves .............................. 11

Anatomy of a Disaster ......... 13

Crop Insurance Takes Center Stage .................................... 16

Data-at-a-Glance .................. 18

Natural Catastrophes and Glob-al Reinsurance—Exploring the Linkages ................................ 20

Consumer Viewpoints on Effec-ve Disclosures ..................... 26

Eric Nordman CIPR Director 816-783-8232

[email protected]

Kris DeFrain Director, Research & Actuarial

[email protected]

Shanique (Nikki) Hall Manager, CIPR [email protected]

Dimitris Karapiperis Research Analyst III

212-386-1949 [email protected]

Anne Obersteadt Senior Researcher

816-783-8225 [email protected]


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26 January 2013 | CIPR Newsle er

C V E D

By Brenda J. Cude, Professor, University of Georgia, and NAIC Consumer Representa ve and Daniel Schwarcz, Associ-ate Professor, University of Minnesota Law School and NAIC Consumer Representa ve

This ar cle expresses the opinions of the authors and is not meant to represent the posi on or opinions of the NAIC or its members, nor is it the official posi on of any staff members.

I Effec ve disclosure of complicated financial products is an increasingly important consumer protec on issue. As the global financial crisis of 2008 demonstrated, many consum-ers fail to understand or appreciate important features of the financial products they purchase. In response to this deficiency in consumer understanding, there is increased a en on across many fronts to more effec vely communi-cate targeted informa on to consumers. One example is the federal Dodd-Frank Wall Street Reform and Consumer Protec on Act, which created the Consumer Financial Pro-tec on Bureau (CFPB). Already, the CFPB has harnessed academic research and empirical methods to develop clear and robust consumer disclosures for non-insurance finan-cial products, such as mortgages. The CFPB is merely one of several federal agencies revamping the ways in which con-sumer disclosures are designed.

Despite a renewed commitment to the disclosure of com-plex financial products at the federal level, the NAIC and state insurance regulators currently do not have a coordi-nated system to develop effec ve consumer disclosures for insurance products. While various NAIC model laws and regula ons deal with the disclosure of insurance policy fea-tures—for example, laws and regula ons governing disclo-sure of the terms of individual accident and sickness insur-ance policies,1 consumer credit insurance,2 long-term care insurance,3 Medicare supplement insurance,4 annui es5 and health insurance policies6—the processes under which the-se laws were developed vary substan ally.

The absence of coordinated processes to create consumer disclosure rules undermines the quality of those rules. First, it generates product-specific gaps in the intensity of disclo-sure rules that are o en hard to jus fy. For instance, much more specific rules will govern the disclosure of health in-surance products a er implementa on of the federal Pa-

ent Protec on and Affordable Care Act than govern disclo-sure of property/casualty insurance products. Second, it results in unconsidered differences in approaches to disclo-sure regula on: depending on the underlying insurance product, disclosure rules can range from quan ta ve reada-

bility scores to rules prohibi ng specifically designated terms to mandatory disclosure documents. Third, it under-mines the NAIC’s capacity to efficiently collect and make use of state-of-the-art knowledge and processes regarding effec ve consumer disclosures.

Insurance contracts are immensely complex legal docu-ments. Without effec ve rules governing disclosure to con-sumers about the content of their policies, many consumers are at risk of failing to appreciate important elements of their insurance protec on. Insurance contracts are dra ed to communicate with courts and lawyers who are focused on par cular ques ons, rather than to communicate with consumers about the broad range of poten al scenarios that are relevant to making purchasing decisions. Typically, these contracts are not even provided to consumers un l a er the policy is purchased.

Consumer understanding of insurance policies is fundamen-tal to the effec ve opera on of insurance markets. The core products that insurers sell are insurance policies. Like all other markets, insurance markets are premised on the as-sump on that buyers can reasonably assess the value they place on different products. If consumers systema cally fail to appreciate the important elements of insurance prod-ucts, then they will tend to purchase coverage that does not meet their needs or preferences. Perhaps even more im-portant, insurers may be rewarded for altering their policies in ways that ul mately harm consumer welfare and be pe-nalized for increasing the generosity of their terms of cover-age in ways that benefit consumers (Schwarcz, 2011).

Although certain principles cross-cut the design of effec ve consumer disclosures, this ar cle does not focus on disclo-sures regarding issues other than the scope of insurance coverage, such as underwri ng methods, consumer privacy or the existence of state guaranty funds. Addi onally, this ar cle’s focus is on summary disclosures that are provided to consumers at the me of purchase or beforehand.

T P F D The general purpose of informa on-disclosure requirements is to improve consumer informa on. Par cularly relevant for insurance regulators is the prospect that insurance con-sumers may have incorrect or incomplete informa on re-

(Continued on page 27)

1 NAIC Model Laws, Regula ons and Guidelines 170-1, § 6. 2 NAIC Model Laws, Regula ons and Guidelines 360-1, § 6. 3 NAIC Model Laws, Regula ons and Guidelines 641-1, § 8. 4 NAIC Model Laws, Regula ons and Guidelines 650-1, § 5. 5 NAIC Model Laws, Regula ons and Guidelines 245-1, § 5. 6 Proposed model disclosure.


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January 2013 | CIPR Newsle er 27

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garding the features of the insurance products they pur-chase or consider purchasing. There are several related rea-sons why regula on might a empt to correct this type of informa on deficiency (Kirsch, 2002). First, regulators may pursue disclosure of insurance product features to improve consumers’ product understanding. Product understanding enhances the likelihood that con-sumers will purchase the types of insurance products and features that best meet their needs and preferences. For instance, a consumer who is aware that her homeowners insurance policy does not cover floods may then decide whether to purchase federal flood insurance. Consumer understanding of insurance products is par cularly im-portant because of the role that moral hazard and adverse selec on—both products of informa on asymmetries—play in the design of insurance products. Many insurance con-tract provisions are designed to limit the risk of moral haz-ard by excluding coverage for high-risk ac vi es. But these contract provisions are only effec ve if policyholders are aware of them; otherwise, they merely shi moral hazard risk to consumers rather than causing consumers to take op mal levels of care. Insurance contract provisions are also commonly designed to limit “adverse selec on”; i.e., the prospect that high-risk policyholders will be drawn to insurance. By excluding cov-erage that is par cularly valuable to high-risk individuals, insurance contracts can theore cally cause high-risk policy-holders to “self-reveal” by purchasing more extensive cov-erage. Once again, this classic insurance contract solu on to adverse selec on does not work unless policyholders are familiar with the scope of the coverage they purchase. A second core reason that regulators may require disclosure of product features is to enhance consumers’ capacity to comparison shop, which allows consumers to find the cov-erage that best fits their needs and budgets. Informed com-parison-shopping also improves the incen ves of insurers to cra their products in a manner that genuinely reflects con-sumer preferences. Third, regulators may require disclosure in order to pro-mote fairness and transparency. The goal here is not to al-ter or inform consumer decision-making. Rather, it is funda-mentally to provide consumers with a procedural right to inform themselves. This right may be valuable not because consumers frequently take advantage of it. Rather, its value lies primarily in promo ng trust in the marketplace by as-suring consumers that they have the capacity to become informed if they are so inclined.

Understanding the purpose or purposes of disclosure is cru-cial, as this purpose impacts the form that the disclosure ought to take. Broadly construed, there are two basic types of disclosure: summary disclosure and full disclosure. Summary disclosure is “o en required at the point of purchase” and “highlight(s) the most relevant informa on in order to in-crease the likelihood that people will see it, understand it, and act in accordance with what they have learned” (Sunstein, 2010). Summary disclosure is generally aimed at either promo ng product understanding or enhanc-ing comparison-shopping. Because summary disclosure is intended to directly inform consumers by providing only the most relevant informa on, it presents numerous design chal-lenges for regulators. Full disclosure, by contrast, provides all relevant infor-ma on, o en including underlying data. Although full disclo-sure is not generally an effec ve strategy for promo ng product understanding, it can be quite important to pro-mote effec ve comparison-shopping. The reason is that full disclosure allows market intermediaries, such as consumer-oriented magazines, to offer advice to consumers about compe ng companies. It also may facilitate the capacity of a small minority of engaged consumers to make decisions that reflect full informa on, which can have posi ve effects on uninformed consumers (Schwartz and Wilde, 1979). Finally, through the above two mechanisms, full disclosure helps to ensure that firms’ reputa ons are more accurate. Full disclosure also can be an effec ve strategy to promote fairness and transparency, so long as consumers enjoy a realis c capacity to access this informa on. Unlike summary disclosure, however, designing a system to provide full disclosure can be rela vely straigh orward, depending on the underlying context. Most important, there is no need for regulators to make decisions about which informa on to priori ze, as all informa on is dis-closed. Addi onally, while the usability of a full-disclosure system is important, greater sophis ca on can typically be expected of the audience for full disclosures. For these rea-sons, the balance of this ar cle focuses on the design of summary disclosures. T E M S D R T Mandatory summary disclosure is not an effec ve response to every market problem. In fact, mandated disclosure has o en proven ineffec ve in responding to a variety of market



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problems (Ben Shahar and Schneider, 2011). Moreover, the effec veness of mandatory disclosure could well depend on the existence of complementary regulatory tools that are simultaneously deployed. For instance, manda ng disclo-sure of pre-specified contract terms may be ineffec ve on its own, but quite effec ve if such disclosure were coupled with regulatory rules manda ng the use of a limited num-ber of specific policy forms. Two basic condi ons should be met in order for summary mandatory disclosure to cons tute an effec ve regulatory strategy. First, consumers must systema cally make subop-

mal choices because they lack relevant informa on (Weil, Fung, Graham and Fogo a, 2006). There are a variety of reasons other than deficits in informa on that consumers may make decisions that raise regulatory concerns. In some cases, for instance, consumers may make problema c deci-sions because the benefits or costs of their decisions are felt largely by others (externali es). Thus, some consumers may fail to purchase automobile insurance because the cost of that failure is primarily borne by poten al accident vic ms. Alterna vely, research increasingly demonstrates that con-sumers o en systema cally make certain types of mistakes because of cogni ve heuris cs and biases. These mistakes can relate to product a ributes, such as the coverage that an insurance product provides, as well as use pa erns, such as how o en the consumer will make a claim (Bar-Gill and Ferarri, 2010). In certain instances, these heuris cs and bi-ases can be manipulated by market actors to exacerbate the likelihood of consumer mistakes or magnify the conse-quences of those mistakes. To take one common example, there is good evidence that consumers suffer from behav-ioral biases that lead them to purchase policies with de-duc bles that are too low (Kunreuther and Pauly, 2005). When consumer behavior is the result of either externali es or cogni ve biases, informa on disclosure on its own will rarely be an effec ve remedy. Second, it must be the case that, with the informa on that is provided in a disclosure, consumers would have the will and capacity to change their behavior. In some cases, the under-lying product or market context may make effec ve disclo-sure that actually impacts consumer behavior prac cally im-possible, irrespec ve of the amount of care and effort that is put into cra ing such disclosures. This may be most likely when the relevant informa on is sufficiently complex that it cannot be boiled down to a basic metric, piece of informa on or recommenda on. It also may be par cularly likely when the required ming of any disclosure means that it will be provided to the consumer at the same me as numerous

other disclosures or a er the consumer has made the psycho-logical commitment to the purchase. Alterna vely, disclo-sures may be less effec ve if they are provided and/or ex-plained by individuals who have financial incen ves to under-mine the essen al message of that disclosure. Effec ve disclosure may also prove impossible when con-sumers lack basic knowledge of the insurance product about which informa on is being disclosed. In such cases, consum-ers may be unable to meaningfully use the disclosed infor-ma on. For example, disclosing that wellness visits are not subject to a deduc ble may mean li le to a consumer who does not know what either a wellness visit or a deduc ble is. Although this problem may be overcome where consum-ers can be provided basic consumer educa on as a compo-nent of or a companion to disclosure, in many cases, such consumer educa on may not be prac cal, thus rendering disclosure an inappropriate regulatory tool. If relevant informa on will improve consumer decisions, and consumers have the will and capacity to change their behavior, then informa on disclosure may be an appropri-ate response. However, such disclosures must be carefully designed to inform decisions, rather than cons tu ng mere technical requirements. As Cass Sunstein, the former head of the federal Office of Informa on and Regulatory Affairs, explained in a June 18, 2010, memo for the heads of execu-

ve departments and agencies: “There is a difference be-tween making a merely technical disclosure—that is, making informa on available somewhere and in some form, regard-less of its usefulness—and actually informing choices. Well-designed disclosure policies are preceded by a careful analy-sis of their likely effects.” Susan Kleimann, a consumer com-munica ons expert, said in an interview, “Disclosure is most appropriate when data can be changed into informa on and then into knowledge and then consumers can do something with that—make an informed decision.” In sum, the following threshold ques ons should be an-swered to determine if disclosure is an appropriate consum-er-protec on response to address a market issue. In as-sessing these ques ons, regulators should remember that mandatory disclosure can, and o en should, be used in con-junc on with other regulatory tools, such as product stand-ardiza on, regulatory review, consumer educa on and mini-mum product requirements. • What is the underlying market problem genera ng the

need for a regulatory response? Is this market problem driven by consumers’ lack of informa on, or instead by



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externali es or cogni ve biases? If it is driven by mul -ple causes, to what extent can disclosure be coupled with other regulatory techniques more appropriate to alterna ve causes of the problem?

• Can consumers reasonably be expected to make be er decisions with the informa on? What structural imped-iments are likely to affect consumers’ capacity to digest informa on, and to what extent are those impedi-ments capable of being counteracted through a regula-tory mechanism?

• When do insurance consumers need the informa on to be disclosed? Can the informa on be delivered to con-sumers at that me? To what extent will disclosure be provided by an individual or en ty whose financial in-terests are poten ally undermined by the disclosure?

• In what form should the informa on be delivered? Can the informa on be delivered to consumers in that way?

• Do consumers have sufficient experience with the product to use the informa on? If not, would an educa-

onal product (in addi on to the informa on disclo-sure) improve consumers’ use of the informa on to achieve the stated purpose of the disclosure?

• Can addi onal regulatory strategies be effec vely com-bined with mandatory disclosure? Would any of these supplemental approaches address some of the draw-backs or limita ons of mandatory disclosure?

S R D D -

I Insurance regulators who are considering consumer disclo-sure as a regulatory response can think of the process as having eight steps. Consumer advocates recommend that regulators follow these steps when developing consumer disclosures: 1. Confirm that disclosure is the appropriate regulatory

response. 2. Iden fy the purpose and expected outcome(s) of the

disclosure. 3. Iden fy the content of the disclosure. 4. Determine whether the disclosure is to be dra ed by

the regulator or will be dra ed by insurers pursuant to specified guidelines and criteria.

5. Ensure the readability of the disclosure. 6. Design the disclosure or, for disclosures to be provided

by insurers, provide guidelines and criteria by which to evaluate the design.

7. Determine when and how the disclosure should be delivered for maximum effec veness.

8. Determine whether tes ng of the disclosure with con-sumers is useful.7

Further explana ons of the recommended steps in develop-ing consumer disclosures follow: 1. Confirm that disclosure is the appropriate regulatory

response. Considera ons to determine whether a disclosure is an ap-propriate response: • What is the regulatory issue? • Will the disclosure help the consumer make be er deci-

sions? • Do consumers have sufficient experience with the prod-

uct to use the informa on? If not, would educa onal material—such as a brochure or pamphlet (in addi on to, or in lieu of, the informa on disclosure)—improve consumers’ use of the informa on to achieve the stated purpose of the disclosure?

2. Iden fy the purpose and expected outcome(s) of the

disclosure. A er determining that disclosure is indeed an appropriate regulatory approach, the next step in developing the disclo-sure should be to iden fy the purpose of the disclosure. Regulators should carefully consider and specifically ar cu-late what consumer decisions the disclosure is intended to impact. A best prac ce would be for regulators to be as spe-cific as possible in describing the goals of a disclosure. 3. Iden fy the content of the disclosure. The most crucial issue in designing any summary disclosure is determining what informa on should be provided in that disclosure. As a rule, it is more difficult to provide effec ve consumer disclosure for complex products or when the in-forma on to be disclosed is more complex. Decisions about content are specific to individual disclosures; however, the following key principles should shape this determina on. First, the purpose of the disclosure, as iden fied in recom-menda on #2, should be a guiding force in deciding on the content of the disclosure. All content should be scru nized to assess the extent to which it advances this goal. Second, regulators must always bear in mind that there is a natural limit to the amount of informa on that can be effec-

vely provided to consumers. If disclosures include more


7 See Perry and Blumenthal (2012) and Kozup, Taylor, Capella and Kees (2012) for a discussion of tes ng the effec veness of disclosures.


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than a few pieces of informa on, those disclosures typically will be ineffec ve. It is important to remember that disclo-sures are only effec ve when consumers understand what they mean. 4. Determine whether the disclosure is to be dra ed by

the regulator or will be dra ed by insurers pursuant to specified guidelines and criteria.

When establishing the informa on to be disclosed, regula-tors must also determine how it is to be stated, providing the precise language. Or, they may specify the content to be communicated, leaving the precise language up to the insurers. Wri ng the disclosure obviously puts an addi onal burden on the regulator. However, in the long run it has two advantages: • It creates consistency across companies, which facili-

tates comparison shopping among consumers by allow-ing them to easily assess the differences among com-pe ng products.

• It eliminates any unnecessary enforcement responsibil-ity on regulators who would otherwise have to deter-mine whether the disclosure actually communicated the required informa on.

5. Ensure the readability of the disclosure. True readability requires disclosures using plain language that is designed to facilitate consumer understanding. Guidelines for wri ng plain-language documents are availa-ble at the www.Plain Language.gov. A typical checklist in-cludes most of the items iden fied below: • Avoid jargon, technical language, or extraneous infor-

ma on. • Require an ac on (signature/ini als/checklist). • Do not repeat informa on. • Provide examples. • Use short sentences. • Provide a way to get more informa on online, by

phone and/or in person. • Include a glossary. • Make the informa on as specific as possible to the indi-

vidual consumer; if that is not feasible, make it specific to the product and/or the decision being made.

• Write for the average reader, which requires knowing the intended audience for the disclosure.

• Use “you” and other pronouns that the reader can iden fy with.

• Use ac ve voice. • Omit excess words. Use concrete, familiar words. • Use “must” to express requirements; avoid the ambigu-

ous “shall.” The words in a document are not the only factor that deter-mines how readable that document is. The organiza on of a document has an equal or greater influence. In organizing a disclosure, regulators should: • Use a tle that communicates the value to the consum-

er of reading the disclosure and headings that help con-sumers find the informa on they need.

• Put the most important informa on near the beginning (i.e., the purpose, ac on required).

• Break informa on into sec ons. • Consider using a ques on and answer format. • Make the disclosure as short and concise as possible. 6. Design the disclosure or, for disclosures to be provided

by insurers, provide guidelines and criteria by which to evaluate the design.

The design of a disclosure influences its usefulness to con-sumers. Even consumers who are capable of understanding a complex document will o en not devote the me and energy to do so, unless it is in a format that is easy to read. Some design sugges ons include: • Use a format that looks readable (bullet-point items,

charts, lists). Lines longer than 65 characters are diffi-cult to read.

• Do not jus fy the right-hand margin or use all capital le ers.

• Use ver cal (rather than horizontal) lists. • Use color and highligh ng to emphasize important

points and to signal sec on changes. • Use a larger font. • Make the disclosure look important (put it on different

color or type of paper; present it separately from other paperwork).

• Highlight any ac on suggested or required. • Do not use small sheets of paper (which require small

font). • Make the disclosure as short and concise as possible. 7. Determine when and how the disclosure should be

delivered for maximum effec veness. (Continued on page 31)


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The ming of a disclosure is crucially important in determin-ing its ul mate effec veness. Consequently, regulators must carefully consider when consumers need the infor-ma on in the disclosure in light of the disclosure’s purpose. Par cularly important on this front is to provide consumers with disclosures intended to promote comparison-shopping at a me before the consumer has emo onally commi ed to a purchase or spent a substan al amount of me and energy learning about or applying for a specific product. Thus, making a disclosure available early is important. Regu-lators may also wish to address the need for delivery re-quirements, such as maintaining a record of delivery of that disclosure. 8. Determine whether tes ng of the disclosure with con-

sumers is useful. Consumer tes ng of proposed disclosures can assist regula-tors in evalua ng the effec veness of the disclosures. Con-sumer tes ng could be considered a “best prac ce” in cra -ing disclosures, but the necessity of u lizing consumer tes ng must be balanced against the costs, poten al delay and efficacy of conduc ng such evalua on. Consequently, regulators should consider whether resources are available when determining whether tes ng should be conducted. Consumer tes ng can range from informal distribu on of a proposed disclosure for comment and sugges on up to en-gaging professionals to test prototype disclosures. This range includes, but is not limited to: • Presenta on of the proposed disclosure to a consumer

group, such as a consumer insurance council, for re-view, comment and sugges ons as to effec veness and clarity.

• Use of structured focus groups of a small number of individuals using open-ended ques ons to collect infor-ma on across a spectrum of poten al users of the dis-closure.

• Cogni ve interviewing of a small number of consumers to explore how consumers make sense of the infor-ma on within a document. Cogni ve interviewing is a one-to-one technique that allows the interviewer to explore individual responses to capture the consumer’s thinking process and understanding.

• Online tes ng may be conducted by asking consumers to choose between various formats, such as mapping how consumers “click through” parts of a disclosure (i.e., a “heat map” that displays graphically which areas were clicked on most).

More complex disclosures may benefit from consumer tes ng to ensure they are understandable and effec ve, but consumer tes ng may not be necessary for more simple disclosures. Regulators must balance the need for consumer tes ng against the costs and complexity of conduc ng such tes ng. If it is determined to be appropriate to do consumer tes ng, regulators should choose a tes ng procedure which will produce the highest effec veness for the resources ex-pended. S The development and implementa on of effec ve disclo-sures is an important issue for insurance regulators and the consumers they serve. The authors hope this ar cle pro-vides useful guidance regarding consumer disclosures. Regu-lators should keep in mind the complexity of insurance in-forma on and, therefore, when developing disclosures, seek to communicate in ways that will increase consumer understanding. References • Bar-Gill, O. and Ferrari, F. (2010). Informing Consumers about Them-

selves, Erasmus Law Review, 3(2), 93-119. • Bason, J.J., and Mauney, M.A. (2005, March). Na onal Associa on of

Insurance Commissioners Insurance Disclosure Focus Group Study. Kan-sas City: Na onal Associa on of Insurance Commissioners.

• Ben Shahar O., and Schneider, C. (2011). The Failure of Mandated Disclo-sure. University of Pennsylvania Law Review, 159, 647-749.

• Cogan, Jr., J.A. (2009, August 20). Plain English is the best policy. The New York Times.

• Cude, B.J. (2005). Insurance disclosures: An effec ve mechanism to in-crease consumers’ insurance market power? Journal of Insurance Regula-

on, 24(2), 57-80. • Frey, D. (1982). Different levels of cogni ve dissonance, informa on

seeking, and informa on avoidance. Journal of Personality and Social Psychology, 43(6), 1175-1183.

• Greenwald, M. (2005). Using research to help make disclosure state-ments more effec ve: A case study in research design and implementa-

on. Journal of Insurance Regula on, 24(2), 11-20. • Jin, G. and Leslie, P. (2003). The Effect Of Informa on On Product Quality:

Evidence From Restaurant Hygiene Grade Cards. Quarterly Journal of Economics, 118(2), 409-450.

• Kirsch, L. (2002). Do product disclosures inform and safeguard insurance policyholders? Journal of Insurance Regula on, 20(2), 271-295.

• Kleimann Communica on Group, Inc. (2006). Evolu on of a Prototype Financial Privacy No ce: A Report on the Form Development Project, www. c.gov/privacy/privacyini a ves/ cfinalreport060228.pdf.

• Kozup, J., Taylor, C.R., Capella, M.L., and Kees, J. (2012). Sound disclo-sures: Assessing when a disclosure is worthwhile. Journal of Public Policy and Marke ng, 31(2), 313-322.

• Kunreuther, H. and Pauly M. (2005). Insurance Decision-Making and Market Behavior. Founda ons and Trends in Microeconomics, 1(2), 63-127.

• Lanam, L. (2005). Consumer disclosure as consumer protec on. Journal of Insurance Regula on, 24(2), 7-10.



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• Malbon, J. (2010, October), America’s Health Insurance Plans Focus Group Summary. Sea le, WA: JKM Research.

• Malbon, J. (2011, May), America’s Health Insurance Plans Blue Cross Blue Shield Associa on Focus Group Summary. Sea le, WA: JKM Research.

• Na onal Center for Educa on Sta s cs. (2009). Basic Reading Skills and the Literacy of America’s Least Literate Adults: Results from the 2003 Na onal Assessment of Adult Literacy (NAAL) Supplemental Studies). NCES 2009-481. Washington, D.C.: U.S. Department of Educa on.

• People Talk Research and Consumers Union. (2010). Early Consumer Tes ng of New Health Insurance Disclosure Forms. Washington, D.C.: Author.

• Perry, V. G., & Blumenthal, P. M. (2012). Understanding the fine print: The need for effec ve tes ng of mandatory mortgage loan disclosures. Journal of Public Policy and Marke ng, 31(2), 305-312.

• Schwarcz, D. (2007). A Products Liability Theory for the Judicial Regula on of Insurance Policies. William & Mary Law Review, 48, 1389-1463.

• Schwarcz, D. (2011). Reevalua ng Standardized Insurance Policies. University of Chicago Law Review, 78, 1263-1348.

• Schwartz, A & Wilde L. (1979). Intervening in Markets on the Basis of Imper-fect Informa on: A Legal and Economic Analysis. University of Pennsylvania Law Review, 127, 630-682.

• State of Rhode Island. (2009). Office of the Health Insurance Commissioner Regula on 5: Standards for Readability of Health Insurance Forms.

• Sunstein, C. (2010). Disclosure and Simplifica on as Regulatory Tools. Memo-randum for the Heads of Execu ve Departments and Agencies, available at h p://www.whitehouse.gov/sites/default/files/omb/assets/inforeg/disclosure_principles.pdf

• Toppo, G. (2009). Literacy study: 1 in 7 U.S. adults are unable to read this story. USA Today.

• Weil, D., Fung, A., Graham, M., & Fago a, E. (2006). The effec veness of regu-latory disclosure policies. Journal of Policy Analysis and Management, 25(1), 155-181.

• Wroblewski, M. (2005). Uniform health insurance informa on can help con-sumer make informed purchase decisions. Journal of Insurance Regula on, 24(2), 21-37.

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NAIC/CONSUMER LIAISON COMMITTEE · Ragin—wrote in their research paper, The Influence of Sellers...

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