State insurance director tells how he'll run department

Richard Mathias

HIGH COSTS of insurance, outraged policyholders, burgeoning needs for coverage and recent exposures of illegal or dubious insurance practices are all concerns of Richard Mathias, the state's new Department of Insurance director. Mathias wants an activist, consumer-oriented program to deal with these problems, although he admits he cannot solve them all. An insurance pro himself, he practiced corporate law for Allstate Insurance Company in Northbrook prior to his nomination by Gov. James R. Thompson as insurance director. Following graduation from Denison University, Granville, Ohio, and a law degree from the University of Michigan Law School, Ann Arbor, Mich., he served a year as an Illinois legislative intern before accepting a position with the Richard B. Ogilvie administration as a liaison with insurance firms, banks, and savings and loan institutions. Under his direction the 200 personnel in the Department of Insurance monitor and regulate the activities of more than 1,450 insurance companies and approximately 70,000 agents and brokers doing business in

the state under about 230,000 licenses. The mountains of paper in the department's Springfield offices continue to grow, as new requirements for long-term maintenance of records require more volumes to be stored and the current freeze on equipment purchases eliminates the possibility of new file cabinets.

The following interview took place on April 14, three weeks after Mathias was confirmed by the Senate on March 24. Sitting in his crowded Monroe Street office, Mathias focused on his responsibilities and departmental objectives and also provided a preview of upcoming actions aimed at improving the efficiency of this complex regulatory agency and the lot of the consumer.

Q: Could you tell us taxpayers what your department does?
A: There are two or three basic functions of the department: (1) licensing of new companies just starting out in business and those which are newly admitted to the state; (2) examining companies with respect to their financial solvency as well as their performance, which includes their ability to live up to their contractual obligations; and (3) reviewing and examining policy forms and endorsements and other printed materials (advertisements, etc.) used by insurance companies. It all boils down to seeing that the department is proficient in what I call professional regulation in the public interest — making sure that companies are living up to the law and are providing adequate protection to the consumer.

Q: What about your specific objectives for the department, this year and for the long term?
A: In the short term, my objective is to evaluate the people in this department and the programs to see that consumers, including taxpayers, are getting good value for their dollars and that we are truly regulating in the public interest. That includes an evaluation of all the programs currently underway, a determination of their value and whether they should be continued or discarded. There are, of course, many more specific administrative functions which can always use some attention. As a new director coming into the office I was absolutely overwhelmed by the number of items which required some sort of action. The legislative session was well underway; a number of problems were already burning brightly — not just simmering — and these combined with learning the internal procedures of the office and dealing with the substantive issues themselves, make it almost too much for one individual to comprehend.

Q: What about the long haul?
A: The goal is professional regulation in the public interest. We will make sure that insurance companies live up to the spirit as well as the letter of the law and that they are paying claims promptly and on time in the proper amount. We must protect the insuring public by making certain that companies are financially sound and that they are not engaged in risky investment activities or that individuals are not trying to drain money from a company either through calculated action or through old-fashioned mismanagement. Another whole area of long-term interest to us is the issue of availability of insurance. Not just automobile insurance, which is important, but medical malpractice coverage and the availability of product liability and municipal liability insurance. And, there's the other question of whether or not insurance services that consumers are demanding will be available when consumers want to buy them.

Q: So your primary and most critical functions and goals are consumer oriented?
A: Absolutely. Insurance companies must perform in the public interest.

Q: Recently, prospective insurance agents have complained that the current licensing exam is next to impossible to pass. Is this related to or a result of the cases a few years ago when applicants and department employees were charged with fraud and misconduct in the testing process?
A: Of course, the licensing and testing

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problems arose well before I became commissioner. Tests which were given were developed under my predecessor. I would endorse the concept of outside testing, and I think that [former] Director Wilcox is absolutely right in saying and admitting that the department is unable to police, as adequately as perhaps it should, the testing procedure. The problems have been well documented by newspapers, a grand jury and a legislative investigative commission. I would absolutely concur on the fact that we must have outside testing. As to the type of questions, I think we are improving and are now better able to test the insurance knowledge of the applicants. But, at the same time, you always have the problem of what type of questions can be asked that adequately challenge individuals or adequately gauge their ability to understand the product they are selling. We have made mistakes in the past but are not receiving many complaints about the test now. Our passing ratio is in the area of 75 to 80 per cent, and we believe that's a good test.

Q: What finally happened to the allegations that the insurance exam of John Daley, son of the late mayor, had been changed? Does he have a license now? A: In our eyes, he is a properly licensed agent. I've read the file, and as I understand it, there was never any proof that he was involved in changing his test. There were allegations to that effect but very little hard evidence. It might have also been that if his name hadn't been Daley, no question would have ever been raised. What I'm saying is that because there is an indication that some, perhaps even a few of the tests were misgraded, the director a few years ago concluded it was not fair to retest everyone. Many of those tests were properly graded, but as the director, he could not ascertain who had not been properly tested and, therefore, was going to let the test results stand. Q: How closely will your department stick to the National Association of Insurance Commissioners (NAIC) guidelines when developing rules governing advertising and sales activities of insurance companies? A: We use them as guides. Illinois is one of the four or five leading insurance states in the nation. We have more property and casualty companies than almost any other state, and the same with life companies; some of our problems are unique. I think NAIC models are just that — models — which states can work from; and we do just that. Q: If you had to rank the Illinois department with those of other states, how would it compare? A: We would be ranked in the top four or five. We have many good people, and from my limited personal knowledge of people in departments of other states, I would put our people up against anybody in the other departments around the country. But you also have to look at the appropriations. New York has four times as much as Illinois; other states have appropriations twice as large as ours. I am not certain this means they are four or two times as good as this department; I would doubt that they are. Q: Do companies tend to raid the department for employees? A: Occasionally, but we look upon it as our job to raid the companies! Q: In an interview in Illinois Issues [January 1977], now retired Supreme Court Judge Walter Schaefer was quoted as saying that "regulation of insurance companies is one of the weakest spots in state government in Illinois." Do you agree? A: I read Judge Schaefer's comments prior to becoming insurance commissioner, and after I accepted this position, I went back and read the article again. I wrote and subsequently called him to schedule a meeting to discuss his views. We'll be doing that soon. I am intrigued by his observation and perhaps after our conversation I will have a better idea of what he is talking about. As you know. Judge Schaefer has vast experience and a grand perspective on state government. He has been in the middle of many controversial and progressive issues and I am interested in what he has to say, not only about insurance regulations, but regulations generally.

Insurance bills THE DEBATE on changes in the state's workmen's compensation laws has developed into one of the most volatile in the 80th General Assembly, with labor fighting business interests and Democrats lined up against Republicans. (See Legislative Action, page 26.) While the Department of Insurance has avoided taking sides on the issue, it is necessarily concerned because of its role in setting rates through the workmen's compensation insurance pool. The current debate stems from the recent history of workmen's compensation in Illinois, said Vance Gudmundsen, legislative liaison for the department. Prior to 1975, he said Illinois ranked very low in benefits "which then were increased so much that now Illinois has the highest benefit package of any state in the country. When you increase benefits, you increase the risk to the insurance companies." By nature conservative, they will "charge today what they may pay tomorrow," he said. The department concluded a workmen's compensation hearing late in May with a report due sometime in June. Other insurance problems the department is studying are product liability, redlining, sex discrimination and auto insurance rates. A task force is presently studying redlining and is scheduled to report its findings late in June or early July. Some 20 bills dealing with geographic discrimination were introduced this session. The insurance department has worked closely with Sen., John Merlo (D., Chicago), Sen. James Rupp (R., Decatur) and Rep. Arthur Telscer (R., Chicago) in drafting their bills. Merlo and Rupp's proposal, S.B. 1102, passed the Senate on third reading the end of May. The bill would amend the Illinois Insurance Code to prohibit discriminatory underwriting of homeowners insurance based on geographic location. Insurance Director Charles Mathias established a Marketing Assistance Program (MAP) early in May to assist Illinois businesses to obtain product liability insurance. Mathias said the problem is that "most insurance companies are reticent to write this type of insurance." The department has not yet taken positions on bills in this area since "they tinker around with the tort system," Gudmundsen said. MAP, which is composed of people from the insurance department and industry, will be collecting statistics in this area, he said. This data will help the department decide which bills to support. A special House Judiciary subcommittee was scheduled to hear several bills dealing with product liability June 14. Among those scheduled are H.B.771,1333, 1498 and 1616. Two no-fault auto insurance bills are being closely watched by the department. Gudmundsen said the department worked closely with Sen. Bradley Glass (R., Northbrook) on his proposal, S.B. 1113. Glass's bill is also sponsored by Sen. Robert Lane(D., Chicago), chairman of the Senate Insurance and Licensed Activities Committee and sponsor of S.B. 1017. / M.C.G. 

Q: What controversial or progressive trails will the Illinois department be blazing in the future?
A: We have taken a number of initiatives in the examination of insurance companies. Illinois was the first state to require CPA audits of insurance companies. Now there is one other state following suit. For years, insurance

8 / July 1977 / Illinois Issues

companies were audited and examined by insurance departments every third or fourth year regardless of how poorly a company was doing or how good or bad the management was. We were one of the first to adopt the seemingly simple technique of examination by exception. In the past two weeks, at my request, we have developed a complaint log. We now schedule exams with those companies which have the highest complaint ratios. The companies which are doing the better job will still be examined but not as frequently as those which are in a hazardous financial condition or are not living up to their policy and contractual provisions.

Q: Two of our most necessary insurance coverages, automobile and health, are increasing in cost at an incredible rate. Does your department have any way to help stabilize or slow down this upward spiral?
A: We consider cost containment in the area of accident and health and property liability insurance to be a major issue confronting this department and the consumer. Last week I had the unpleasant obligation of deciding a Blue Cross / Blue Shield rate increase. You have to balance the interest of the consuming public that wants to have the medical care provided to them at a reasonable (in many instances that means a very low) price with the interest and financial integrity of the insurer. It's obvious that no entity— insurance industry or household — can for long pay out more money than it takes in. This was the first rate hearing in regard to Blue Cross in recent times. The department had always just automatically approved the rate increases. We held a very extensive hearing, granting increases that were actual increases in payouts, but denying the increase as it related to overhead of Blue Cross in regard to these payouts as well as any contributions to reserves. After reviewing a voluminous record, I believe that they were unable to justify any rate increase except for the portion which was related directly to payouts.

We also issued very extensive cost containment requirements and have required them to come back to us in 90 days to address specific issues. For example: What is their policy concerning the use of generic drugs? Will they reimburse hospitals for using non-generic drugs when a generic substitute is available and would provide the same quality care? What is their program concerning outpatient surgery? Are they going to reimburse individual doctors and hospitals as well as the individual subscribers [insured] when the subscriber comes into the hospital and has surgery performed which could have just as easily been performed as an out-patient?

We have encouraged the Blues and have asked them to expand their consumer participation on the Blue Cross/ Blue Shield board of directors so that it is not a closed shop between hospitals and doctors. They have taken steps toward this end, and we would hope they would take further steps.

Again, you always have to balance the dollar concerns addressed in cost containment with the human concerns of quality health care, and it is very difficult sometimes to perform that balancing act. Everyone is for cost containment in the abstract and say that doctors are paid too much or are performing unnecessary surgery and that hospitals are charging too much or have too many beds. But when it's my wife or child in the emergency room or it's my parent or in-law in the hospital for a very severe ailment, I am more concerned about quality care than the cost of that care. We're caught in a dilemma of how we can provide quality health care at a reasonable cost. It will not be solved tomorrow, by me or the governor or by any governmental entity.

Q: Are some of the big insurance companies really as bad off as their annual reports and rate increases would lead us to believe or do certain intricate accounting procedures allow for manipulation of the numbers to give that impression?
A: When I was in school, I remember Professor Oppenheim saying, "Bigness is not per se badness," and of course, he's right. While I share that social concern about the bigness of corporations, I have the responsibility as a regulator of seeing that those corporations — miniscule or gigantic— provide the contractually and legally required services to the insured.

Q: What specific projects do you have going that you feel will have some impact on the insurance industry and/ or residents of Illinois?
A: We have a very extensive inquiry into redlining — a term used to describe a practice by insurance companies who cancel or refuse to write homeowners insurance solely because of the geographic location of the home. It's been very interesting reviewing some of the preliminary results of company practices in major metropolitan areas.

Secondly, we have a study underway to investigate whether automobile rates in Illinois are inadequate or excessive in comparison to similar Standard Metropolitan Statistical Areas in other states.

We have established within the department a third task force concerning automobile insurance problems. This was an outgrowth of a Chicago Tribune series in which they outlined what they termed abuses in the automobile insurance business; we have attempted to see how we, as a government regulatory agency, can address these problems and insure that the consumer gets the services he is paying for.

Another task force has been formed to dig into the problems confronting handicapped people in obtaining insurance. And, related to that is the sex discrimination or allegations of sex discrimination lodged against insurance companies. That task force will probably come up with some very constructive recommendations either in the form of regulations or legislation.

Relating back to our long-term goals, we will go public with a product liability commission or Voluntary Market Assistance Committee as we call it. The committee will, at our direction, attempt to obtain insurance for liability coverages that are not now able to be placed by agents in the voluntary market. It will be an effort to assist the agent and the consumer in searching the marketplace to find a company that will accept a particular risk. Many things just can't be insured at the price the consumer wants to pay, but we're going to do everything we can to either place the risk or explain to the consumer what the problems are with a particular product.

Q: Is this new to the industry or are there other insurance departments who are trying it?
A: I think that some have started to do what we're doing.

Q: But, we're staying up front?
A: Well, we'd like to think we're among the leaders. I think it's my goal and my staff's goal to have a department that truly believes in and implements the idea of professional regulation in the public interest. We intend to prove it with a very activist program. 

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