Ch 11 Impact of legislation & regulation on life insurance industry Flashcards
regulations
help in enforcement of law, interpretation of law
-protect consumers, help individuals and corporations better understand how law is intended to operate
unitary system
power concentrated at national level, little power in political subdivisions
confederation
union of equal states
federal system
national govt holds significant power, but smaller political subdivisions also hold power
US and Canada
US Congress
passes laws impacting many aspects of financial services
state legislatures
primary source of insurance legislation, enacting a significant body of legislation that regulates life insurance industry, including licensing, solvency, market conduct review
Canada
laws impacting life insurance passed by Canadian Parliament and legislatures at provincial level
McCarron Ferguson Act 1945
continued regulation and taxation of insurance by states in public’s best interest
-state legislatures pass statutes, state insurance depts enforce them, write regulations, and guidance
-laws passed are recommended through model acts from NAIC
Dodd Frank Act 2009
created Federal Insurance Office responsible for international insurance agreements, data collection and research
-protect financial system from systemic risk presented by financial institutions too big to fail
Financial Stability Oversight Council FSOC
broad authority to identify and monitor systemic risks
International Assoc of Insurance Supervisors IAIA 2008
regulator for US insurers
HIPAA
Health Insurance Portability and Accountability Act 1996
designed to improve efficiency in health care through the standardization of electronic data interchange as well as to provide security measures to protect health information and its disclosure
-protecting against unauthorized disclosure of confidential health info, protects against disclosure outside of normal UW process
US Dept of Health and Human Services HHS
issued regulations in 2003 establishing set of national standards for protection of certain health information
Privacy Rule
standards address the use and disclosure of individual’s health information by organizations subject to Privacy Rule as well as standards for individual’s privacy rights to understand and control how their health information is used
Office for Civil Rights OCR
responsible for implementing and enforcing the Privacy Rule w/ respect to voluntary compliance activities and civil money penalties
Protected health information PHI
- relates to individual’s past, present or future physical or mental health or condition
- relates to provision of health care to individual
- relates to past, present or future payment for provision of health care to individual
- identifies individual or for which there is a reasonable basis to believe it can be used to identify the individual
- includes any common identifiers (name/address/DOB/SSN)
Canadian Life & Health Insurance Assoc CLHIA
developed a comprehensive set of privacy guidelines
-not permitted w/o individual’s express written consent
Personal Information Protection & Electronic Documents Act PIPEDA
establishes ground rules for how private sector organizations can collect, use or disclose personal info in the course of commercial activities
USA Patriot Act
enhances authority of US law enforcement for the state purpose of investigating and preempting potential terrorist acts against US
-requires anti-money laundering programs
STOLI
Individual solicited w/ offer for free insurance for short duration, purchases policy, finances it w/ loan, intent is always to sell policy in life settlement transaction when loan matures, financing is bridge to life settlement market
Issues in STOLI
- lack of insurable interest
- legality: not in best interest of citizens, states enacting laws against
- loan: payments labeled as loans subject to recharacterization by IRS
- hybrid financing: masks intent to settle, or can force settlement
- insurance capacity: diminishes future ability to obtain coverage
- SEC/NASD action: policies are financed and packaged for sale to investors, can be deemed a security needing regulation
- rebating: promised participation fee or offer of free insurance protection
- legal complexity
- health/privacy issues
- discrimination: targeted at specific age group
- congressional action regarding tax treatment of life insurance: Congress can remove tax advantages of life insurance
- fraud
Canada’s Uniform Life Insurance Act
specific rules on insurable interest
-yes: own life, children, grandchildren, spouse, dependent, corporations, associations, trusts
-no: if no insurable interest, policy void
unless PI consents in writing
CHOLI
leveraged, w/ loan proceeds to finance large block of CHOLI on donors’ lives or lives of parties unrelated to charity, who donate their insurability to charity
COLI
purchased to fund post-retirement benefit liabilities for key employees
-cash value accumulates tax free, death benefit proceeds income tax free
-used to recover all costs associated w/ benefit program
-Best Practices Act: restricts to class of highly compensated employees, must provide notice and obtain consent, establish disclosure and record keeping requirements, tax imposed if requirements not met
viatical
company purchases policy from terminally ill, payments made by viatical settlement companies reflect significant discounts of face amount depending on life expectancy
-ADB and viatical settlements for terminally ill and chronically ill exempt from federal income tax
life settlement or senior settlement
purchase of policies on lives of insureds who are typically elderly but healthy
-owners get more than surrendering for CV
-NAIC model law from 2007 requires companies and brokers to have license for viatical settlement agreements
Life Settlement Model Act
defines STOLI and make it a fraudulent act to enter into any plan or practice that involves STOLI, prohibits misuse of trusts and premium financing, prohibits sale or transfer of policy for 2 years
state guaranty association
protects policyholders from insolvent insurers, state govts regulate insurance companies and monitor solvency of insurers
-licensed life and health insurers must be members, not fraternal
secondary guarantee
keeps an insurance policy in force and guarantees death benefit, even when policy would otherwise lapse because of lack of cash value, when certain contractual requirements are met
specified premium guarantee
provides policyholder w/ guaranteed death benefit as long as pays specified premium each year
-allows for early, late payment of premiums
shadow account product
alternative or hypothetical account value is calculated using an alternative set of expense charges, cost of insurance and interest
-allows for early, late payment of premiums
Regulation XXX
required companies to increase reserves for secondary guarantee features found on UL policies
Actuarial Guideline AXXX
developed to interpret Regulation XXX, increased reserving requirements for secondary guarantees using the shadow account approach as well as for specified premium guarantees that are pre-funded
Principles-based reserving PBR
alternative approach to establishing reserves, allows insurers to establish reserves based on individualized statistical modeling, rather than a stated, rate-based formula to more adeptly right size reserves by insurance product type
Actuarial Guideline 48
bring states into compliance w/ uniform standards of financing reserves by providing greater specificity to the actuarial methods companies were required to calculate reserves
retaliatory premium taxes
states w/ low premium tax rates can impose a retaliatory tax against insurance companies from high premium tax states who are conducting business in a low premium tax state
UW Issues
- Travel: legislative activity passed by states restricting adverse UW actions based on lawful past or future travel activities, adverse decisions must comply w/ Unfair Trade Practices standards, 15 states passed legislation
- Genetic Testing
Genetic Information Non Discrimination Act 2008 - US
applies to health insurers and employers, not life, disability or LTC
-amendment of HIPAA includes LTC
-state genetic UW laws focused on restrictions related to health insurers
Genetic Non Discrimination Act GNDA
Canada
employers may not require genetic testing of employees, nor may businesses deny services to customers based on results of genetic tests, nor may contracts require genetic testing
-appealed to Supreme Court, no decision rendered currently
motivation for mergers/acquisitions
- desire to expand distribution beyond that which is capable through organic growth
- desire to boost shareholder value
- desire to fend off hostile takeover attacks
- drive to enter markets not currently served
- desire to reduce operating expenses
- need to increase capital
3 ways life insurance can do business
- stock company - stockholders own company
- mutual company - policyholders own mutual company
- mutual holding company - hybrid form
demutualization
private, member owned company changes its structure to become a publicly-traded company owned by shareholders
mutual holding company conversion
mutual insurance company becomes stock insurance company wholly owned by a mutual holding company
-policyholder contractual rights remain w/ stock life insurance company and membership rights transfer to mutual holding company
-used to avoid hostile takeover attempts
Sherman Antitrust Act of 1890
illegal to conspire to restrain interstate and foreign trade
Hart-Scott Rodino Antitrust Improvement Act
easier for regulators to investigate mergers for antitrust violations
Securities & Exchange Commission SEC
enforce the securities laws passed, to promote stability in markets and protect investors
-access to basic facts about investment before purchasing
-public companies must disclose meaningful financial and other info to public
Securities Act of 1933
Securities Exchange Act of 1934
- companies publicly offering securities for investment dollars must tell public truth about their businesses, the securities they are selling and risks involved in investing
- people who sell and trade securities, brokers, dealers, exchanges, must treat investors fairly and honestly, putting investors’ interests first
Financial Industry Regulatory Authority FINRA
dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services
-monitors life insurance business
-prevent fraud by subjecting producers to rigorous licensing and continuing education requirements
-spot examinations of client files and marketing materials used w/ consumers
Legislation and Regulation that Protects Consumers
- HIPAA
- model NAIC laws governing viatical transactions: protects medical info, prevents fraud
- FINRA: prevents fraud of producers
- rebating rules
- state guaranty associations
- Regulation XXX & AXXX
American Council of Life Insurers
represents members before federal and state policymakers, insurance depts and courts
National Association of Insurance and Financial Advisors NAIFA
nonprofit that represents producers and associates
-advocate for positive legislative and regulatory environment, enhance business and professional skills and promote ethical conduct of its members
Association of Advance Life Underwriting
AALU
committed to preserving insurance through political involvement
-keeps members informed of latest regulatory and business developments affecting advanced life UW products and services
-monitors bills, proposed regulations and court cases that affect clients, business owners and professionals
