U.S. insurance companies boast assets of $5.6 trillion. They benefit from virtually no federal oversight. And the state officials who do regulate insurance companies often are drawn from the industry they police.
That’s how insurance regulation works in America. But too often it may not be working for you.
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Insurance companies have far deeper pockets, and far greater political pull, than consumers might ever dream of — and their influence is considerable.
The reason is simple. Big money is at stake. Insurance premiums now equal roughly 10 percent of the U.S. gross domestic product.
“The industry gets what it wants across the country,” said Doug Heller, director of the Foundation for Taxpayer and Consumer Rights, a non-profit California-based consumer advocacy group.
The Kansas City Star found:
•Regulators and insurance executives routinely trade jobs through a “revolving door.”
More than half of the 35 insurance commissioners who left their jobs in the last three years got new jobs with the insurance industry, law firms, or lobbying groups that work for it, according to an informal nationwide survey by the newspaper. One-third of the new commissioners’ replacements came from the insurance field.
•Insurance companies invest millions of dollars attempting to influence regulators and lawmakers.
Insurers spent $119 million lobbying federal officials in 2005 — more than the auto industry and commercial banking combined. Only pharmaceutical companies spent more money on lobbying than insurance companies. Insurance also regularly ranks in the top 10 of industry campaign contributors, giving candidates more than $230 million since 1999.
•Elected state insurance commissioners tend to be more consumer-friendly than appointed ones.
The newspaper’s database analysis showed, for example, that insurance complaints filed in Washington state — where voters choose commissioners — are twice as likely to be decided in favor of consumers as those in Maryland, where politicians pick commissioners.
Unfortunately for consumers in 39 states, including Missouri, insurance commissioners are appointed. In Kansas and only 10 other states, commissioners are elected.
Insurance industry spokesmen, lawmakers and regulators all said that lobbying and campaign contributions are just the political reality in America today. They also dispute that the revolving door between state insurance commission offices and corporate boardrooms offers any more influence than that enjoyed by other regulated businesses.
“There are times when I wish they (the industry) would be much more active,” said Marc Racicot, the president of the American Insurance Association, who once served as Montana’s governor and chairman of the Republican National Committee and President Bush’s re-election campaign.
But the influence big money can buy occasionally tempts big-time corruption. In Louisiana, three consecutive insurance commissioners went to prison in recent years.
Yet most of the time, regulators and lawmakers do the industry’s bidding in ways that are perfectly legal.
State Sen. James Seward of New York, chairman of the insurance committee, sponsored bills giving insurers tax credits, easier ways to reorganize their corporate structure, and a proposal that would weaken state oversight of auto insurance rates. Seward has received $500,000 in contributions from insurance interests.
Former California Commissioner Chuck Quackenbush allowed insurers to avoid investigations and fines for underpaying policyholders after a major earthquake. The insurers gave Quackenbush free TV commercials and made donations to charities that included his son’s football camp.
Terri Vaughan, former Iowa insurance commissioner, approved a company’s reorganization, which enabled it to become a public company. The company, Principal Financial, later gave Vaughan a seat on its board of directors. Her old boss, Iowa Gov. Tom Vilsack, took contributions from company insiders, including more than $40,000 from a former chairman.
Seward did not return repeated telephone calls for comment. Quackenbush said he didn’t do anything wrong but his political opponents forced his resignation. Vaughan stood by her decision.
Local politicians also benefit from the close relationships. Insurance interests contributed $1 million to Kansas lawmakers in the past 10 years, and $4 million to Missouri lawmakers.
During that time, Missouri lawmakers passed industry-friendly bills to put new limits on medical malpractice lawsuits and to restrict public access to insurance complaints. They also proposed to shield insurers from having to disclose illegal behavior to regulators and even the courts.
The last bill was defeated after critics said it amounted to a “get-out-of-jail free” card for insurers. But the proposal’s sponsor, state Sen. John Loudon, defended the measure. Loudon, a licensed insurance agent, has received more than $20,000 from insurance interests during his political career. He says his bill was needed to protect insurers from frivolous lawsuits.
“Some people tried to immediately say we’re just trying to hide stuff,” said Loudon, a St. Louis County Republican. “But the plaintiffs’ bar always wants things wide open. They want it wide open so they can go fishing for business.”
Revolving door spins
Even some insurance regulators concede the cozy relationship can lead to lax oversight that hurts consumers.
“You wonder if you get a little bit of the fox guarding the henhouse,” said Georgia’s elected commissioner, John Oxendine, a politician and attorney who has never worked in the industry.
But insurance companies maintain that hiring former regulators gives them a more consumer-friendly perspective. And commissioners maintain that industry experience gives them understanding of the industry’s arcane rules.
Besides, “if you precluded all the people who came from the industry, who would you be left with?” asked former Connecticut Commissioner George Reider, who worked in the industry before becoming a regulator.
However, the way commissioners are appointed — usually by governors — worries consumer advocates and some former commissioners. Critics contend you don’t have to look further than Missouri.
Insurance Director Dale Finke is a former insurance agent and once led the state Association of Insurance Agents. When the director’s seat became vacant last year, Gov. Matt Blunt asked a group of campaign donors and insurance insiders to screen candidates. Finke was their first choice.
Insurers gave Blunt’s campaign $135,000 in 2004. Finke and his wife have contributed $6,300 since 2003.
“In most cases, even when a progressive, pro-consumer governor is elected, the insurance commissioner is the insurance industry’s appointment,” said former Missouri Insurance Director Jay Angoff, who served during Mel Carnahan’s administration. “Blunt just asked the industry and made no bones about it: Who do you guys want?”
Blunt’s spokesman at the time, Spence Jackson, said governors commonly consult with stakeholders before filling a position, but denied any link to campaign money.
“This is a governor who does not make policy decisions based on campaign contributions,” Jackson said.
Finke said his background as an independent insurance broker helps him deal with different insurance companies. “I’ve never been considered to be overly friendly to them,” he said.
The revolving door spins both ways for politicians.
Former South Carolina Gov. Jim Hodges is now president of the National Alliance of Life Cos. Ex-Oklahoma Gov. Frank Keating heads the American Council of Life Insurers. Other governors also have gone on to serve on corporate boards.
David Schiff, a former insurance executive who now publishes a trade newsletter, said one commissioner told him he went easy on companies that might offer him a job. Schiff suspects many others do the same.
“So many commissioners sit on boards, take jobs with companies they regulated (that) you don’t even notice anymore,” he said.
Lobbying and influence
Lawmakers sometimes get more money from insurance interests than the average American worker makes in a year.
The money isn’t hard to find. In September, Kansas Commissioner Sandy Praeger held a fundraiser in St. Louis during the quarterly conference of the National Association of Insurance Commissioners, where The Star counted industry executives and lobbyists outnumbering commissioners more than 10 to 1.
In her first campaign, Praeger accepted more than $28,000 from Topeka-based American Investors Co., its parent company and subsidiaries, according to Kansas campaign records — more than she received from any other insurer. Executives and their family members contributed another $8,000 to Praeger.
Since taking office, Praeger hasn’t conducted any investigations of the company’s performance.
Praeger said her office would investigate American Investors if it had a high number of complaints. Yet The Star found that of the 20 biggest annuity companies doing business in Kansas, American Investors had the worst complaint score.
Mark Heitz, president of AmerUs Annuity Group, has said that the company, which includes American Investors, receives complaints from less than 1 percent of its customers and its goal is to offer “competitive products backed by quality customer service.”
Praeger said there is no connection between her actions and campaign donations. She said that she has pushed tougher rules on how annuities are sold, something she wouldn’t have done if she were doing favors for an annuity company.
“To me it’s not about who’s making the donation, but who the donation is going to,” Praeger said. “It’s about the official’s integrity.”
Big campaign donors, however, can use money as a weapon, according to California Commissioner John Garamendi. This year, Garamendi asked the FBI to investigate after he said insurers threatened to spend $2.4 million against his campaign for lieutenant governor if he outlawed the use of home ZIP codes in setting auto insurance rates.
“They are one of the most powerful lobbying forces in the country,” Garamendi said.
Insurance money seeps through all levels of government. U.S. Sen. Hillary Clinton and outgoing Sen. Rick Santorum each accepted more than $350,000 from insurance interests so far in the 2006 election cycle. Since 2003, California Gov. Arnold Schwarzenegger has accepted more than $2 million from insurance interests.
Blunt awarded contracts to run Department of Motor Vehicle fee offices to four leading contributors in the insurance business. Those offices collectively generate more than $1 million in business for the contract holders.
The FBI conducted an investigation into the awarding of fee office contracts in Missouri, but ended it without seeking any indictments. But mixing money with politics has led to legal troubles elsewhere:
•Chicago insurance mogul Mickey Segal and his employees gave more than $400,000 to city, state and federal candidates between 1990 and 2002. Segal counted the mayor’s brother and the governor’s son as business partners. Some politicians got free or discounted insurance. Segal’s firm won millions of dollars worth of city contracts.
Segal was convicted in 2004 of raiding insurance reserves. Prosecutors also said Segal circumvented campaign finance laws by paying employees to make private donations.
In a letter to The Star from prison, Segal said he was prosecuted by the political allies of an insurance rival.
•Louisiana Insurance Commissioner Sherman Bernard pleaded guilty to taking bribes. His successor, Doug Green, served 12 years in prison for taking $2 million in illegal contributions from an insurer. And his successor, Jim Brown, served six months in 2002 for lying to FBI agents investigating an insurance settlement.
“You get wined and dined, there are golf outings and there is no limit on what is spent,” Brown said. “There are huge industry pressures and a lot of money being thrown around. None of it’s illegal, but …”
•Former Oklahoma Insurance Commissioner Carroll Fisher is under house arrest after being found guilty this year of campaign corruption. He pocketed a contribution and accepted gifts from an insurance company. Fisher also blamed politics for his downfall.
“I don’t know who I (ticked) off,” Fisher said.
Regulators may be getting the message. More candidates for insurance commissioner are balking at accepting industry contributions.
Washington state prohibits commissioner candidates from accepting insurance money. Washington Commissioner Mike Kreidler said a system of elected regulators prohibited from taking insurance money leads to a greater consumer focus.
“There’s accountability,” Kreidler said. “There’s an expectation that the person who holds this office needs to be a consumer advocate.”
New Jersey also has tight restrictions on campaign donations from insurance companies. In other states, elected regulators choose to go without industry contributions. Kansas Gov. Kathleen Sebelius swore off industry money when she was commissioner.
Candidates in this year’s California commissioner’s race did the same. Lt. Gov. Carlos Bustamante returned some contributions from insurers — but only after the money became a campaign issue.
“I wanted to show them that I would be their insurance commissioner, not the industry’s,” he said.
The story so far
In Parts One and Two, The Star showed how the nation’s largest insurance companies rated in consumer complaints and how insurance agent misconduct and fraud is widespread and getting worse.
@ Go to KansasCity.com for Parts One and Two and for a searchable database rating hundreds of insurance companies.