Research On American’s Insurance Consumer Protection Mechanism

It is the first consumer protection practice in human history that Justices of the Peace and mayors of municipalities determine the metrics and provide criminal punishment for people who does not perform the standard in 17 th century. There is considerable dispute as to whether and how to protect consumers from the 19 th century when Adam Smith put forward the competition is the best regulators. Whether the goods should be regulated the price,quality and variety by the state depends on the efficiency of consumer protection. The foundation of the consumer protection legislation and mechanism is the best value for money. Only when the producer achieve the interests of consumers, the producers’ interests can be achieved. Originally the legal basis is caveat emptor. However it is urgent for consumer protection due to the unequal bargaining power of both trade parties and high individual consumer litigation. The aim of consumer protection is to help consumers make prudent consumption decisions. Because perfect competitive market can reflect the demands of consumers, so both government policies and laws should turn the market into the perfect competitive market..Consumers need to pay the money for the any improvement in the consumer protection mechanism. So consumer protection mechanism must be established on the basis of the cost and proper intervention in production and sales. For cost, the stringent legislation is lower than the complex system of government to protect consumers.From the perspective of contract, the reason to protect consumers is the insurance policy without the precondition to protect the two parties of the contract. From the perspective of industry, health insurance and car insurance need strict regulation to protect insurance consumers because the characteristics of the two kinds of insurance is similar to the public service industry. From the perspective of product, protecting consumers need to set standards of contract terms. Only the appropriate standard policy terms can bind upon the parties of the contract. From the perspective of governor, insurance companies have fulfilled some similar functions of the government. But the insurance company can easily treat customers differently. Thus the core of the protection consumers is to prevent insurance company from discriminating policy holders based on uncontrolled risks.The United States is the most powerful nation in insurance industry since the 20 th century,. Especially after the world war two, the development of insurance industry is more quickly than before. Insurance regulatory framework and many insurance laws enacting after Armstrong investigation in USA play a very important role to promote steady development of insurance industry. The insurance industry in USA has already formed some protection mechanism. From the perspective of contract, regulation pay attention to both ex ante and ex post. From the perspective of industry, consumer protection should focus on health insurance and auto insurance. From the perspective of product, to protect consumers rely on competition to provide the combination of all kinds of risk, cost and coverage to meet the needs of different consumers. Consumer education can lower the transaction costs. From the perspective of governor, the goal of insurance consumer protection is equal protection. When the interests of the majority and the interests of the minority are in the conflict, protecting consumers means protecting the majority; When the interests of the majority and the interests of the minority are in the harmony, protecting consumers cannot infringe the interests of the minority.Complaints with insurance industry in China had happened in USA before Armstrong investigation. No new abuse was found in USA after Armstrong investigation. And almost the big abuse can be remedied by special legal governance. So the history of American insurance consumer protection is very worthy of our learning.The period 1890 to 1920 is called the insurance progressive era in USA. The period covers those years in which the life and fire insurance firms grew to their current degree of importance in American life and nearly all the major reform insurance legislations have been passed. The study of consumerism in this period will help us understand the consumer protection mechanism formed by now in USA. The earliest consumerism focus in the field of life insurance rather than fire insurance, and life insurance and fire insurance has experienced different reform process. So the paper discuss the process of life insurance consumer protection and fire insurance consumer protection separately. The most successful reform movement in life insurance is the Armstrong Investigation and the subsequent laws passed in New York and other states during the years 1905 to 1907, While in fire insurance it is the drive to establish statemade rates in the period 1909 to 1915.The laws passed after Armstrong Investigation are classified into two categories, one is the laws in direction of insurance professional development. This kind of laws are supported by insurance companies, however only bringing the superficial change of consumer protection. For example, policy holder can get benefit from standard policy and plain policy, but the benefits are hard to be dramatically improved. The other is the laws in direction of consumer protection this kind of laws are against by insurance companies, however realize the real consumer protection. For example, expense limitation law bring huge benefits to consumers.Some historical events in American insurance consumer protection are very effectiveness and efficiency, some are not so successful. both of them are worth of our learning.The paper analysis how to regulate insured peril in American consumer protection history taking Tontine as an example; how to control expense in American consumer protection history taking New York Expense Limitation Law as an example; how to regulate policy form in American consumer protection history taking standard policy as an example; how to regulate insurance amount and insurable value in American consumer protection history taking valued policy law as an example. As a conclusion, the paper is given some ideas how to build our country insurance consumer protection mechanism on the basis of adapting from American consumer protection history.Tontines are the driver to American insurance development for 37 years, and provide some earliest reliable actuarial value. Tontines are very important to form modern insurance schemes. However Armstrong committee banned sales of Tontines in 1907.The paper analyses the reasons given by the committee are not appropriate, and calculated the Tontines contribution to American insurance development. From the perspective of cost, Tontines are zero cost strategy to decrease the number of uninsured. Consumers are willing to buy Tontines and Tontines meet the actuarial requirement of policy, so there is no fraud to policy itself. Although Tontines take the use of consumers’ irrational motivation, having a policy does improve consumer welfare. Regulating insured peril should ensure the power of informed choice by policy holders and should not reduce the degree of economic freedom and innovation. The difficulties of insured peril regulation is that there are plenty of new policies containing different insured perils. The principle of insured peril regulation may be not to limit the diversity of consumers choices, prevent from sales misleading.New York Expense Limitation law is the basic principle of the New York state insurance regulation. NY Expense Limitation Law is vehemently opposed by the insurance companies and frequently revised. But the philosophy foundation and the basic principle of the law has not changed. Expense limitation law played an important role on stability of American life insurance. The purpose of expense limitation law is to guarantee reasonable expense, protect policy holders, oppose extravagant waste. Agents’ salaries constitute the large share of the expense of the life insurance company. The competition will reduce the administrative cost of insurance companies, but will increase the cost of sales. Therefore there are many rules about the cost of sales, especially about agents salaries. The paper reveals the philosophical basis of expense limitation law, the purpose and content. The formula designed by expense limitation law is suitable for all types of companies, the big and small companies, the rapid development and the steady development of companies, the branch companies and the general agent companies, considering the expense of all reasonable and necessary, reasonably allowing new business growth and preventing waste and the improper expansion. There is no insurance expense limitation law in China. So we should consider how to introduce it to China.A hotspot of consumer complaints in China is about reading difficultly by the layman in China. In USA, it has a similar problem. The paper prove the readability of American automobile insurance, analysis the reason for the cumbersome nature of many policies, introduce how to simplify the insurance policy for American insurance companies. The paper reveal the relationship between standardization and simplification of policies and provide some suggestions from American process of standardization and simplification of policies.Insurance carriers deliberately overestimate the value of insured property to boost the premiums they could collect. The overvaluing resulted in litigation over the value of the insured property. This abuse happed in China frequently. In American insurance consumer protection history, basing on the particularity of real estate, the valued policy laws were created to fix in advance the value of property being insured and to place upon the insurer the burden of inspecting the property to assure its proper valuation. The paper analysis the actual effect of the valued policy laws, the relationship between the valued laws and the standard policies, reveals the inherent contradiction in the valued policy laws. Methods of the valued policy laws for identifying total loss are worth our learning. At the same time the paper give some solutions for the unequal of insurance amount and the value of insured property in China.The paper propose some ideas about how to built the insurance consumer protection mechanism of our country from the two levels of mission and practice by reviewing the history of American insurance consumer protection and analyzing the important events in the process. The consumer isn’t a class, but every taxpayer. So do insurance consumers. Consumer protection mechanism not only relates to the insurance companies, insurance regulators, but also involving the media, information system, hospitals, schools etc. Insurance consumer protection is a systematic project, the lack of any link will affect the overall effect. In the history of American insurance consumer protection, many events with good intentions bring the bad effect, but at that time, it may be the best improvement strategy according to historical background. Our country’s insurance consumer protection is still a new exploration, although history affords us lessons that merit attention from other countries. There could still be something wrong in the process of building our insurance consumer protection mechanism, but the wheel of history is always moving in the forward direction.