(MONEY Magazine) – Some 51 years ago, while the public was preoccupied with winning World War II, Congress passed a seemingly benign law giving insurers one of the sweetest deals in U.S. financial history. Instead of getting a dedicated federal agency to police its activities, as the Securities and Exchange Commission had been doing with securities firms since the 1930s, the insurance industry would have to answer almost exclusively to individual states. Congress could still write laws affecting insurers, and the federal government would oversee a few specific programs such as flood insurance. But for the most part, consumers were being told that they must rely on state legislatures and mostly politically appointed commissioners to make sure the insurance industry dealt the public a fair hand.

We hear a lot these days about giving authority for regulation back to the states. Well, in the case of the insurance industry, which now controls $3.1 trillion in assets, the states have clearly shown they're not up to the job. "What we often have is the illusion of regulation," says former Texas insurance commissioner Robert Hunter, who is now insurance director of the Consumer Federation of America. Indeed, a four-month, 50-state investigation by MONEY (conducted with CFA's help) reveals that insurers and agents today so dominate the regulatory system that is supposed to police them that they stack the deck against consumers. Specifically, insurers are free to withhold meaningful disclosure in their investment products, make it extremely difficult to compare policies, share information to set premium costs and stifle attempts to reform such practices. As a result, Hunter figures that the public pays an estimated 5% to 10% more for coverage than it should. Annual cost: as much as $65 billion a year.

Here are the highlights of our investigation:

--To a large extent, the insurance industry writes the laws that govern it. Though insurance industry employees make up less than 2% of the American work force, at least 15% of the state lawmakers who serve on committees overseeing insurance legislation are insurance agents or company executives, or are otherwise connected to the industry. In 12 states, legislators linked to insurers make up more than 20% of such committees, as the table on page 54 shows. States with the highest concentrations: Mississippi (40%), Louisiana (38%) and Arkansas (37%). CFA's Hunter says that legislatures heavily populated by lawmakers affiliated with the insurance industry are generally less likely to enact laws protecting consumers' rights.

--In state after state, there's a consumers' revolving door between the insurance industry and insurance commissioners. Frequently, the insurance commissioner comes from the industry, and many commissioners leave their jobs to work for insurance firms in high-paying jobs. MONEY has determined that the current insurance commissioner in at least 19 states was previously an insurance executive, agent, owner of an insurance brokerage, an attorney in a firm with insurance clients or otherwise affiliated with the industry. CFA's Hunter estimates that well over 100 former commissioners now work for the industry as well. Such a revolving door may make commissioners biased in favor of insurers in their rulings. After all, commissioners can walk into lucrative jobs with insurers after leaving office, which can make them less apt to fight rigorously for consumers or take on legislatures. Two notable revolving doors: Former Virginia insurance commissioner Steven Foster may have tripled his $96,500 salary by jumping to $219 billion Prudential Insurance in May to work in the company's compliance office. Also in May, Elaine McReynolds (pictured on page 51) quit her post as head of the government's flood insurance program for a second stint with $10 billion American General Life & Accident in Nashville. McReynolds had earlier worked for the same insurer before serving as insurance commissioner of Tennessee. (For a look at how McReynolds prohibited agents from offering discounts on flood insurance, see the box below.)

--Insurers and agents shower legislators with millions of dollars in campaign contributions and lobbying money. For the three years to 1996, the insurance industry contributed a total of $20.8 million to congressional campaigns and political party organizations. That's 56% more than the $13.3 million that securities firms gave, and nearly twice as much as the $11.9 million from banks. Another example: In the most recent Washington state legislature election, insurers contributed $338,285 to candidates, more than any group except health-care professionals and unions.

Insurance commissioners and industry spokesmen vehemently deny that state regulation has failed consumers. "I'm aware that there are instances where we could do a better job," says Brian Atchinson, Maine superintendent of insurance and president of the National Association of Insurance Commissioners. "But in most cases our scrutiny of the industry is rigorous, and we are effective in protecting consumers' rights." And American Council of Life Insurance spokesman Ken Vest rejects outright the notion that policy premiums are 5% to 10% higher than they should be. "Prices are set by a well-regulated and competitive market," he says.

Predictably, state legislators also insist that their links to the industry don't compromise their allegiance to constituents. Many even assert that their insurance background is a plus. Republican Sen. Larry Kimble, an insurance agent who serves on West Virginia's Banking and Insurance committee, told MONEY: "It's important to have people in the legislature who know something about the industries they oversee." Similarly, insurance groups contend that their campaign contributions are intended not to sway legislators unduly or take advantage of consumers.

Our reporting, however, suggests that such assertions are rationalizations at best. On the question of insurance agent/legislator's loyalties, for example, consider the fund-raising letter Washington Republican Rep. Scott Smith, vice chairman of the Financial Institutions and Insurance committee and an agent for Farmers Insurance, recently sent on his company stationery to more than 600 Farmers agents around the state. After bragging about his influence with other members of his committee, Smith promised: "I will continue to represent our interests in Olympia."

Proof of the industry's muscle also lies in the laws it gets passed. In Texas, for example, where 25% of the legislators overseeing insurance have links to the industry, the legislature last year approved a legal reform measure that will hurt consumers by making it more difficult to stop insurers from engaging in such illegal practices as redlining--that is, refusing to sell policies to inner-city residents. Meanwhile, in Michigan, a recent law insulates insurers from liability if they level fraud charges against a customer that are later dismissed, as long as the insurer is acting "without malice." It also requires that the charges, proven or not, remain on the customer's insurance record.

What follows is a closer look at the main ways insurers promote their interests at your expense:

INFLUENCE IN THE LEGISLATURES

If anything, the raw count of the insurer-connected state legislators (181 of 1,234) understates the industry's power in state capitals. For one thing, in at least 16 states those legislators with industry connections serve in positions of authority such as the chairman of an insurance committee. Also, numbers alone don't indicate how connected many of these lawmakers are to the industry. For example, William Irons, the Democratic chairman of Rhode Island's Senate Corporations committee, which has primary jurisdiction over insurance matters, not only owns an insurance agency but is a trustee of the National Association of Life Underwriters, a national lobbying group for life and health insurance agents.

What's more, our figures reflect only insurer-related legislators on primary insurance committees. Often, others allied with insurers hold key political positions. For example, over the past two years, Democratic majority leader of the Virginia House of Delegates C. Richard Cranwell has simultaneously worked as a lawyer guiding Virginia's largest health insurer, Trigon Blue Cross/Blue Shield, through the process of converting from nonprofit to for-profit status. In 1994 and 1995, Trigon paid Cranwell's law firm more than $560,000 in fees. And in Hawaii, one of the state's most powerful legislators, Senate Ways and Means committee chairwoman Donna Ikeda, is also an executive at $177 million Grand Pacific Life. Ikeda has acquired such a reputation for pushing her industry's agenda that fellow legislators and consumer advocates have dubbed her "The Insurance Lady."

SOME VERY COZY TIES TO INSURANCE DEPARTMENTS

Critics have long contended that state insurance commissioners frequently work to promote the interests of the industry they're supposed to be regulating. "Insurance departments too often see themselves as departments of development that assure that insurance companies make money," says Kevin Hennosy, editor of the Communique, a newsletter that monitors insurance regulation. As a result, you rarely see a state insurance commissioner provide the public with detailed information that will help in choosing the best policies, or compel agents to disclose to customers how much of their premiums are siphoned off in sales commissions. Joseph Belth, the editor of the Insurance Forum newsletter, professor emeritus of insurance at Indiana University and an industry watchdog for 30 years, offers a blunt explanation: "They don't want to go the disclosure route because they may antagonize the industry and lose their jobs."

Consumer groups contend that commissioners coming from pro-industry backgrounds can't help but favor insurers while in office. "I have significant doubts that they can shift gears and be objective," says Jason Adkins, executive director of the Center for Insurance Research in Cambridge, Mass.

One commissioner whose industry ties raise questions about his ability to protect the public is Tennessee's Douglas Sizemore. For the past three years, Sizemore, who earns $78,900 annually as commissioner, has been embroiled in a $3 million lawsuit brought by Jerry Owens, a former maintenance worker, and his wife. Owens claims that Sizemore's insurance agency, Johnson City Wofford Bros., collected health insurance premiums but never used the money to buy policies from an insurer. As a result, Owens says he was left without medical coverage after suffering a stroke in 1989 that left him in a wheelchair and destitute. Sizemore and his defense attorney refused to speak to MONEY. A spokesman for Republican Gov. Sundquist said the governor was aware of the suit when he appointed Sizemore commissioner but doesn't believe it affects his ability to serve.

Another cloud hovers over Sizemore--he may still own his insurance agency. Since the commissioner plays a role in approving rate increases, such ownership could help him enrich his own company, which would be a direct conflict of interest, according to Brian McGuire, director of the Tennessee Citizen Action government watchdog group. A personal attorney for Sizemore told MONEY that the commissioner sold the agency to his son Mark in January 1995 but that the company's books don't reflect the sale because the stock certificates can't be found. In a May 1995 deposition, however, Sizemore said he owned all the company's stock. And local tax records still list the commissioner as the owner of the business.

The chief insurance regulators in New York and Michigan previously worked as insurance lobbyists. New York superintendent of insurance Edward Muhl was a registered lobbyist for Royal Insurance in Charlotte, N.C. before being appointed by Republican Gov. George Pataki in January 1995. Muhl also served as a vice president of the Reliance Insurance Group. Saul Steinberg--who along with his family owns nearly half the shares in the corporate parent of the Reliance Insurance Group--made the maximum allowable contribution for individuals ($25,000) to Pataki's 1994 gubernatorial campaign, and Steinberg's wife kicked in another $12,000.

Adkins, of the Center for Insurance Research, says that Muhl has shown no interest in fighting for consumers. Rather, he maintains, Muhl's main thrust has been to unshackle insurers from nettlesome rules. Last year Muhl even sent out a letter to insurers asking them which regulations they wanted axed. Fair enough. But he made no comparable effort to get in touch with consumer groups to find out which practices they objected to. Muhl declined to speak to MONEY.

Michigan insurance commissioner D. Joseph Olson is also an industry booster. For 12 years before Republican Gov. John Engler appointed him to the job in May 1995, Olson served as a registered lobbyist and general counsel for Citizens Insurance, one of the largest writers of home and auto coverage in Michigan. Olson was also treasurer of the Michigan Insurance Federation's political action committee and, as he frankly admitted to MONEY, "tried to get legislation passed that was favorable to the industry and get legislation killed that wasn't."

Michigan consumer groups were outraged at Olson's appointment. "Olson isn't a shill for the industry--he is the industry," said Rick Stoddard, former executive vice president of the Michigan Consumer Federation. Indeed, Olson unabashedly told MONEY that he doesn't see balancing consumers' and insurers' needs as part of his job. "The spartan forces of the marketplace will protect consumers," he says. Asked if he's concerned that his career as a lobbyist might hurt his credibility with Michigan consumers, Olson replied: "As long as I have my governor's support and legislative access, then I'm pleased with the job I'm doing."

After leaving office, commissioners have no trouble finding work in the industry they previously regulated. Proof: When the National Association of Insurance Commissioners gathered in New York City in June, for example, an estimated 40 ex-commissioners and more than 100 former department staffers, many now working for insurers, prowled the halls and meeting rooms lobbying the present commissioners and their staffs.

Some industry observers are especially troubled by the recent move to Prudential of Stephen Foster, the former Virginia commissioner and an ex-president of the National Association of Insurance Commissioners. In one week, Foster went from being the top regulator of a state participating in a 29-state task force investigating Prudential for alleged sales abuses to working for the target of the investigation. Prudential also faces a national class-action suit brought by disgruntled policyholders alleging churning of policies and other abuses.

Foster, described as a man of integrity by industry sources and consumer advocates, told MONEY he has no ethical problem. "I never had any involvement with the task force while I was commissioner and never discussed the task force's work," he said. But a scathing editorial by insurance-industry trade publication National Underwriter said the idea that Foster was so out of touch with the enormous market conduct scandal "strains credulity." Industry skeptics believe Foster could use his connections with other commissioners to fashion a favorable settlement with the task force--and perhaps even sidestep a court battle in the pending class-action suit. "There's no doubt Prudential would rather deal with the commissioners--many of whom Foster knows--than juries," says CFA's Hunter. A Prudential spokesman admits the company hired Foster for his experience with compliance issues but says he will not be working with the multistate task force.

THE POWER OF MONEY

Besides the obvious campaign donations, insurers also routinely buy access and influence through relentless lobbying of lawmakers and regulators. One popular way they hobnob with legislators from many states at once is by attending seminars and meetings run by the National Conference of Insurance Legislators (NCOIL), a putative research and educational organization partially funded by insurance companies. Jamie Court, a consumer advocate who monitors insurance issues for the Proposition 103 Enforcement Project in California, attended an NCOIL meeting last November in San Francisco. "It was the ugliest cross-pollination I've ever seen," he says. "There were hotel rooms full of legislators and insurance lobbyists schmoozing each other and plotting what they could do next on behalf of the industry." Over the past two years, the Massachusetts State Ethics Commission fined insurers John Hancock and the New England $110,000 and $20,000 for illegally entertaining lawmakers--in some cases at NCOIL meetings. The commission levied smaller fines against 14 present and former state legislators too.

As if the mismatch between insurers and consumers wasn't lopsided enough, in recent years insurers have also mastered so-called fake grass-roots, or AstroTurf, activism. By mobilizing business allies and its own employees, the industry creates the false appearance of spontaneous public support for itself. One method is funding groups whose names smack of consumer-driven support. Take, for example, People for a Fair Legal System, an Arizona group that has spent $5.2 million pushing tort reform measures that would limit the damages juries can award in lawsuits. The organization gets 70% of its funding from State Farm and works out of a building that houses State Farm offices.

Insurers also surreptitiously direct letter-writing campaigns designed to help pass or kill legislation. In South Carolina earlier this year, Healthsource, one of the state's largest HMOs, hosted two lunches for 100 representatives of companies whose employees buy its policies. One reason: to distribute form letters opposing a bill that would require HMOs to provide benefits even if members saw doctors outside the HMO's network. The representatives were asked to copy the letters onto their own company letterheads and send them to insurance committee members. Healthsource marketing and communications manager Kathy Bartlett described the paint-by-numbers strategy to MONEY as "making it easier for business leaders to express feelings they already had."

Finally, insurer and agent groups can call on their own vast networks of employees and members to push for legislative action. The American Council of Life Insurance, for example, runs a so-called Citizen Action Network that comprises 200,000 employees at 350 member companies who receive "Action Alerts" when the ACLI wants a show of support on pending legislation. Some large insurers, such as the ITT Hartford Group, operate their own artificial grass-roots programs and typically give their employees everything needed to express themselves--paper, a list of legislators and their addresses, plus the insurers' position on the issue.

Both ACLI and ITT Hartford insist that employee participation is voluntary. But critics dispute that claim. "Employers wield an inherent coercive power over employees," says John Stauber, co-author of Toxic Sludge Is Good for You, a book that examines corporate lobbying efforts. "If you want to be seen as a willing employee eager to advance, you may think twice about saying no."

In state after state, consumer advocates told MONEY that there is no way volunteer-staffed and underfunded consumer groups can stand up to the insurers' lobbying juggernaut. "To say we're outgunned is an understatement," says Jean Ann Fox, president of the Virginia Citizens Consumer Council. "When you start with such a disparity of resources and add the ties of legislators to the industry, it's difficult for consumers to be heard over the roar of special-interest money."

Reporter associates: Joan Caplin, Paul Katzeff, Stephen Marsh, Edward Martin, Elizabeth Roberts, Christy Scattarella, Gary Taylor, Ami Walsh and Jeff Wuorio