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CPCU 520 > Ch 2 > Flashcards

Ch 2 Flashcards

1
Q

What effect did Paul v. Virginia have on insurance regulation?

A

1869/Virginia/Samuel B. Paul: US Supreme Court upheld state regulation of insurance.

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1
Q

What effect did the South-Eastern Underwriters Association’s decision have on insurance regulation?

A

SEUA: compact between about 200 insurers that controlled 90% of SE market. 1944/US Supreme Court: the following acts now apply to insurance:
1) Sherman Act/1890 - prohibit collusion to gain monopoly - can no longer band together to control rates and coverages.

2) Clayton Act/1914: in conjunction with Robinson-Patman Act (1936) prohibit activities that lessen competition or create monopoly power (price discrimination, tying (must buy one product when purchasing another. Robinson-Patman Act limited price discrimination to differentials attributed to difference in operating coss resulting from competing in good faith.
3) FTC Act of 1914: prohibit unfair methods of competition and unfair or deceptive trade practices. Promotes competition.

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2
Q

What effect did the Sherman Antitrust Act have on insurance regulation?

A

1890/Congress/Prohibits contracts, combinations, and conspiracies in restraint of trade and other attempts to monopolize the market.(can still exchange cost and pricing information in a competitive environment per 1925 noninsurance clause. rating bureaus started becoming popular)

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3
Q

What effect did the McCarran-Ferguson Act have on insurance regulation?

A

Returned insurance regulation to the states.

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4
Q

What effect did the ISO and AG lawsuit have on insurance regulation?

A

Eliminated perception that ISO provided a vehicle for insurer collusion.

Lawsuit by 7 states AGs: alleged conspiracy for global boycott of certain types of CGL coverages, particularly environmental damages from pollution. ISO drafted language.

Result: ISO reorganized. Rate and form decisions are made by ISO staff.

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5
Q

How does insurance regulation protect consumers?

A

Reviewing policy forms to determine whether you benefit consumers and comply with state consumer protection laws.

Protect against fraud and unethical behavior.

Ensure that insurance is readily available. (Cancellation restrictions)

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6
Q

How does insurance regulation maintain insurer solvency?

A

Solvency regulation protects Insureds agains the risk the insurers will be unable to meet their financial obligations.

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7
Q

How does insurance regulation assist in preventing destructive competition?

A

protects against insurers lowering price to increase market share. This drives down price levels in entire market and could lead to inadequate rates, which could lead to insolvency. Some carriers might stop writing or leave the market, producing an insurance shortage.

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8
Q

What are the regulatory activities of State Insurance departments?

A

Executive branch. Enforce insurance laws enacted by the legislature.

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9
Q

What duties are performed by state insurance departments?

A

licensing insurers

  • licensing producers
  • approving policy forms
  • holding rate hearings and reviewing rate filings
  • evaluating solvency info
  • market conduct examinations
  • rehabbing/liquidating insolvent insurers.
  • investigate policyholder complaints
  • prevent fraud
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10
Q

Arguments for federal regulation?

A
  • uniformity
  • more efficient
  • attract more experienced personnel
  • less expensive / less duplication (each state)
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11
Q

What are the licensing requirements for insurers and insurance personnel?

A
  1. Financial Strength
  2. Integrity
  3. Competence
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12
Q

Why do insurers become insolvent?

A 
Poor management is too reason. 
Rapid premium growth 
Inadequate rates
Inadequate reserves
Excessive expenses
Lax controls over managing general agents 
Uncollectible reinsurance. 
Fraud
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13
Q

What is the goal of rate regulation?

A

Insurer financial stability and, as a result, consumer protection. Three major goals are to ensure that rates are:

1) adequate
2) not excessive
3) not unfairly discriminatory.

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14
Q

What are the major types of state rating laws?

A 
Prior approval 
File and use 
Use and file 
No laws
Flex rating laws
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15
Q

Reasons supporting rate regulation.

A
  • rate increases have to be justified
  • help maintain solvency by ensuring adequate rates
  • keep rates reasonable and fair
  • without regulation insurers would raise rates to unfairly earn expressive profits.
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16
Q

Reasons opposing rate regulation.

A
  • rates could be inadequate by the time they are approved. Could lead to less new business written and insurance availability problems.
  • less expensive
  • more flexible. Rates can be adjusted in response to changing economic and market conditions.
  • free market forces lead to reasonable and fair rates.
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17
Q

How is policy wording regulated?

A

Through legislation an insurance departments’ rules, regulations, and guidelines.

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18
Q

How is market conduct regulated?

A

Monitoring market conduct of the following for unfair trade practices:

producer practices; fraud/dishonesty, misrep, twisting (induce insd to replace one policy with another), unfair discrimination, rebating.

Underwriting practices

Claims practices

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19
Q

How do regulatory activities protect consumers?

A

State insurance departments respond to consumer complaints (rates/policy cancellations/difficulty finding insurance), and they provide information and education to consumers. They also publish complaint ratios for consumers’ use, shoppers guides.

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20
Q

Term: Robinson/Patman Act

A

imited price discrimination to differentials attributed to difference in operating coss resulting from competing in good faith.

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21
Q

What is the condition of the McCarran Ferguson Act that is important because if it is not met, regulation returns to Congress?

A

States must have their own antitrust legislation and their own unfair trade practices legislation. Federal government still had control over boycott, coercion, intimidation, labor relations.

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22
Q

What was the NAIC’s Act Relating to Unfair Methods of Competition and Unfair Deceptive Acts

A

A model act to help states develop own laws to prevent federal government from controlling the insurance business as prescribed the the McCarran Act.

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23
Q

What did the Gramm-Leach-Bliley Act achieve?

A

States continue to have primary regulatory authority over insurance activities. Bank related firms can now sell insurance as producers an banking activities is overseen separately.

Compels stated to facilitate producers ability to operate in more than one state. Allowed states 3 years to develop reciprocal licensing agreements. O
Also treats underwriting differently from sales/marketing. National banks can’t underwrite through a subsidiary but can arrange for a holding company to create an insurance affiliate. Makes it difficult for a failing bank to use insurer assets.

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24
Q

Why is the insurance industry regulated?

A

Correct market imperfections:

1) protect consumers
2) maintain insurer solvency
3) prevent destructive competition

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25
Q

Why do insurance regulators try to maintain sound financial conditions of private insurers?

A
  • insurance provides future protection.
  • regulation is needed to protect the public interest.
  • insurers have a responsibility to Insureds. (Holding funds)
  • insurers have become insolvent despite solvency reviews.
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26
Q

Pro elected commissioner:

A
  • Elected official in office for a full term
  • Appointed commissioner might pick up where last left off and elected would change things
  • Appointed may not be aware of publics concerns. Elected would
  • appointed would yield to those who appointed him. Elected not obligated.
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27
Q

Proponents of appointing commissioner:

A

Appointed does not campaign and not influence by political contributors.

Appointed not swayed by ill-informed public opinion.

Appointed is seen as government employee instead of politician using office as stepping stone.

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28
Q

An association of insurance commissioners from the fifty U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.

A

NAIC

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29
Q

How are state insurance departments funded?

A

Premium taxes, audit fees, filing fees, licensing fees

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30
Q

A document drafted by the NAIC, in a style similar to a state statute, that reflects the NAIC’s proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affect the insurance industry. Any state may choose to adopt the model bill or adopt it with modifications.

A

Model law

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31
Q

A draft regulation that may be implemented by a state insurance department if the model law is passed.

A

Model regulation

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32
Q

What criteria does a state insurance department need to satisfy to be accredited by NAIC?

A

Laws and regulations must meet basic standard of NAIC models.

State regulatory methods must be acceptable to NAIC

States insurance department practices must be adequate as defined by the NAIC.

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33
Q

Act thy prohibits anyone with a felony conviction involving trustworthiness from working in the business of insurance unless he/she secures permission from an insurance regulator.

A

Violent Crime Control and Law Enforcement Act of 1994

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34
Q

What crimes does the Violent Crime Control and Law Enforcement Act of 1994 identify?

A
  • false statements/reports to ins regulators
  • false entries in books, reports,statements to deceive about financial condition.
  • embezzling from anyone in ins business
  • threats of force to influence, obstruct, impede ins regulatory proceedings
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35
Q

The potential for major disruption in the function of an entire market or financial system.

A

systemic risk

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36
Q

An insurer doing business in the jurisdiction in which it is incorporated. License has no expiration date.

A

Domestic Insurer

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37
Q

An insurer licensed to operate in a state but incorporated in another state. License must be renewed annually. APPLICATION: Must show that it has met requirements imposed in home state and state of application.

A

Foreign Insurer

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38
Q

An insurer domiciled in a country other than the United States. License must be renewed annually. Must establish a branch office in a state in the U.S. and deposit funds equal to fin. requirements of that state

A

Alien Insurer

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39
Q

A balance sheet value that represents the amount of funds that a corporation’s stockholders have contributed through the purchase of stock. Equals the number of shares of stock issued to stockholders times their par value.

A

Capital Stock

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40
Q

The amount stockholders paid in excess of the par value of the stock. Equals amounts paid by stockholders in excess of stocks’ par value.

A

Paid-in Surplus

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41
Q

An insurer owned by its policy holders, formed as an unincorporated assciation for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses the same proportion as the amount of insurance purchased from the exchange by that member.An unincorporated association that is owned by its policyholders and was formed to provide insurance to its policyholders

A

Reciprocal Insurer

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42
Q

What is the UCAA process?

A

Uniform Certificate of Authority. Allows insurers to filed copies of the same application for admission in numerous states.

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43
Q

What info has to be provided on an insurer’s application?

A
  • Apply for a charter
  • Provide names and addresses of the incorporators’
  • Provide name of proposed corporation
  • Territories and types of insurance
  • Total authorized capital stock
  • Surplus
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44
Q

Does the minimum financial requirement regarding stock and paid-in-surplus apply to mutual insurers?

A

No, because they don’t have capital derived from the sale of stock.

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45
Q

When can a policy be placed with a surplus lines broker?

A
  • Insurance not readily available from admitted insurers
  • Nonadmitted insurer is acceptable
  • Producer has special license authorizing him/her to place such insurance
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46
Q

Are nonadmitted insurers protected by the states guaranty fund?

A

No. That is why they have capital and trust account requirements.

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47
Q

What is the PDB?

A

Producer Data Base. A common repository of producer information. Can verify license of any producer.

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48
Q

What is the NIPR Gateway?

A

A communication network that links state insurance regulators with the entities they regulate to facilitate the electronic exchange of producer information.

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49
Q

What are the methods regulators use to maintain solvency?

A

1) regulatory reporting (annual and quarterly), disclosure, transparency
2) off-site monitoring and analysis
3) on-site, risk-focused examinations. (Corporate hurt nance, mgmt oversight, financial strength are evaluated)
4) reserves, capital adequacy, and solvency (RBC calculation. Risk based capital. Standard formula to benchmark specified level of regulatory action for weakly capitalized insurers)
5) regulatory control of significant, broad-based, risk-related transactions/activities. (Licensing requirements, change of control, amount of dividends paid, transactions with affiliates, reinsurance)
6) preventive and corrective measures, including enforcement.
7) exiting the market and receivership.

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50
Q

What are some examples of solvency requirements?

A
  • annual/quarterly submissions of financial statements.
  • must use NAIC Accounting Practices and Procedures Manual
  • must follow codified accounting practices.
  • audit by cpa
  • reserves evaluated by actuary
  • report RBC calculation to regulators.
  • minimum capital & surplus requirements
  • type and quantity of investments is limited.
  • must report investment values to NAIC Securities Valution Office
  • limitations on amount of any single risk
  • reinsurance is governed by NAIC Credit for Reinsurance Model Law.
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51
Q

How are insolvencies managed?

A
  • Commissioner place in receivership.
  • attempt to rehab
  • if can’t rehab, liquidated (Uniform Insurers Liquidation Act - NAIC)
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52
Q

A situation in which an entity’s current liabilities (as opposed to total liabilities) exceeds its current assets

A

Insolvency

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53
Q

A state-established fund that provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in the state

A

Guaranty fund.

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54
Q

When are assessments made for the insolvency fund?

A

When an insurer fails.

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55
Q

In the case of insolvency, when do policies terminate?

A

30 days after failure date.

56
Q

What is the usual maximum limit of a claim when an insurer becomes insolvent?

A

Usually the lesser of $300k or the policy limit.

57
Q

Do states usually provide a refund for unearned premiums when an insurer is insolvent?

A

Yes. Most do.

58
Q

What is the standard deductible most states apply to claims for an insolvent insurer?

A

$100 (workers comp exempt from deductible)

59
Q

Monitoring solvency protects insureds and the public by accomplishing these two goals.

A
  • Reducing the insolvency risk.

- Protecting the public against loss when insurers fail.

60
Q

Why do regulators only strive to keep insolvencies infrequent and manageable, rather than eliminating them?

A

Because if the capital requirements are too high, the insurers must hold more money in reserve. The costs of this along with the increased costs of regulation would be passed along to the insured.

61
Q

Why is is regulation of rate adequacy complicated?

A
  • actual expenses aren’t known when policy is sold.
  • price competition (to keep up) can cause inadequate rates
  • adequate rates might not be approved due to public policy reasons or disagreements over level of requested rates.
  • unanticipated events could lead to higher losses than projected.
  • regulatory actuaries and insurer actuaries may not agree about assumptions used to determine trends or account for socioeconomic components of a proposed rate change.
62
Q

All of the following are duties of a state commissioner except.

  1. Review pricing and coverage
  2. Investigate policyholder complaints.
  3. Hold hearings on insurance issues
  4. Maintaining records of insurance department activities.
A

2.

63
Q

Requires rate approval by the insurance department before rates are used.

A

Prior approval law

64
Q

Lets insurers file rates with the insurance department and use them pending the department’s approval.

A

File-and-use laws

65
Q

Lets insures implement rate changes immediately and later submit filing information that is subject to review.

A

Use-and-file laws

66
Q

Lets insurers raise or lower rates withing a certain percentage range around previous rates without prior approval.

A

Flex rating law

67
Q

What areas does legislative policy regulation affect?

A

Standard forms, mandatory provisions, prohibited provisions, forms approval, readability standards.

68
Q

What is SERFF?

A

System for Electronic Rate and Form Filings. A system designed to make rate filing easier and more efficient.

69
Q

What actions do insurance regulators take to protect consumers agains unfair underwriting practices?

A
  • Constrain insurers’ ability to accept, modify, or decline applications. (To force company to accept exposures they don’t want to write, but legally have to)
  • establish allowable classifications
  • restrict the timing of cancellations and nonrenewals.
70
Q

Provide examples of unfair trade practices with respect to underwriting.

A
  • discriminate unfairly when selecting loss exposures
  • misclasify loss exposures
  • cancel/nonrenew contrary to rules, statutes, provisions
  • using unfiled/unapproved rates
  • not applying new uw and rating factors to renewals
  • using wrong rates or forms
  • using rules that aren’t state specific
71
Q

How do insurers usually recover assessments paid for insolvent insurer?

A

32 states: rate increases.

Others: reduce state premium taxes for 5 years.

72
Q

The manner of handling claims that requires an insurer to give consideration to the insured’s interests that is at least equal to the consideration it gives its own interests. Requires the insurer to give its insured’s interests at least as much consideration as it gives its own.

A

Good-faith claim handling.

73
Q

Examples of Unfair Claims Settlement Practices

A
  • knowingly misrep of important facts or policy provisions
  • failing to properly investigate and settle claims
  • Failing to make a good faith effort to pay claims when liability is reasonably clear
  • Attempting to settle claim for less than the amount a reasonable person believes he or she is entitled to receive based on advertising material that accompanies or is part of the application
  • Failing to approve or deny coverage of a claim within a reasonable period after a proof-of-loss statement has been completed.
74
Q

What does market analysis do?

A
  • Allows regulators to identify general market disruptions.
  • Promotes uniform analysis by applying consistent measurements between insurers
  • Facilitates communication and collaboration among regulators from different states.
75
Q

What is MCAS?

A

Market Conduct Annual Statement. It is collection of regulatory information from insurers.

76
Q

What are financial rating organizations and how do they regulate insurers?

A

A.M. Best Company/ Duff and Phelps/ Moody’s/ Standard & Poor’s/ Weiss Ratings, Inc.; Corporate risk managers, independent insurance producers, consumers, and others consult these ratings when choosing an insurer. Insurers strive to avoid bad ratings as this makes it difficult to attract new business.

77
Q

The person or organization that borrows money from a mortgagee to finance the purchase of a property

A

Mortgagor

78
Q

Independent corporations that work with and on behalf of insurers that purchase or subscribe to their services. Services include prospective loss costs and standard contract forms

A

Advisory organization

79
Q

Loss data that is modified by loss development, trending, and credibility processing but without considerations for profits and expenses

A

Prospective loss costs

80
Q

What are insurance advisory organizations and how do they “regulate” the insurance industry?

A

Insurance Services Office (ISO), the American Association of Insurance Services (AAIS), and the National Council on Compensation Insurance (NCCI); Advisory organizations develop standard insurance policy forms and provide data regarding rates or prospective loss costs; provide a degree of uniformity that can benefit consumers and regulators as well as serve insurers.

81
Q

What are insurance industry professional and trade associations and how do they “regulate” insurers? E

A

AIA, CPCU Society, IIABA, etc. Goal is to advance success of their members and uphold ethical standards. Provide educational, leadership, and ethical development for members and employers. May recommend or support industry practices or legislative initiatives.

Trade associations give timely access to legislative developments on the national level and can use association personnel to help them lobby on behalf of the industry group. Participation in major trade associations can provide info that would otherwise require a large staff.

Trade associations influence NAIC, State, Federal regulators. They act as a voice for a major segment of insurers. This can help develop legislation, regulations, and rules.

82
Q

What are consumer groups and how do they “regulate” insurers?

A

Represent consumers. Have influenced state insurance departments, state and federal legislators, the NAIC, and insurance consumers themselves.

Ex. CFA (Consumer Federation of America) is an advocacy organization that provides information to consults about auto insurance and works to improve the safety of household products. The Public Citizen has helped lead to auto safety laws.

Complaints can trigger market conduct examinations that can either lead to insurer earnings or revocation of a license.

83
Q

What role did Paul v.Virginia play in establishing which level of government should regulate insurance?

A

Paul v.Virginia was an 1869 U.S. Supreme Court decision that insurance is not interstate commerce. This decision affirmed state regulation of insurance and denied federal authority to regulate insurance.

84
Q

What role did the Sherman Antitrust Act play in establishing which level of government should regulate insurance?

A

The 1890 Congressional Act prohibited collusion to gain a monopoly and prevented insurers from banding together to control insurance rates and coverage.

85
Q

What role did the South-Eastern Underwriters Association decision play in establishing which level of government should regulate insurance?

A

The South-Eastern Underwriters case overruled Paul v.Virginia and stated federal government had authority to regulate insurance. The South-Eastern Underwriters case did not create a structure of federal regulation for insurance.

86
Q

What role did the McCarran-Ferguson Act play in establishing which level of government should regulate insurance?

A

The McCarran-Ferguson Act provided that regulation of insurance would remain with the states and federal antitrust laws would not apply to state control of rate regulation. Federal antitrust laws still applied to boycotts, coercion and intimidation.

87
Q

What changes occured at ISO that resulted from the settlement of the attorneys general lawsuit?

A

ISO was reorganized. The board was changed to three insurance company executives, seven noninsurers and ISO’s president as the chairperson. Insurer committees have been dissolved and replaced with insurance advisory panels, whose members make recommendations in their areas of expertise.

88
Q

How does Gramm-Leach Bailey address authority for regulating insurance, banking and securities functions?

A

Authority for regulating these businesses is now determined by function. Insurance is regulated by state insurance departments, banking by banking regulators, and securities by securities regulators.

89
Q

How does Gramm-Leach Bailey address bank’s authority to underwrite insurance?

A

National banks are prohibited from underwriting insurance through an operating subsidiary but can arrange for a financial holding company to create an insurance affiliate.

90
Q

How does Gramm-Leach Bailey address privacy?

A

Banks are required to disclose their information sharing policies and practices with customers

91
Q

How does Gramm-Leach Bailey address producers ability to write in more than one state?

A

Compels stated to facilitate producers ability to operate in more than one state. Allowed states 3 years to develop reciprocal licensing agreements.

92
Q

Why is protecting consumers an important role of insurance regulation?

A

Majority of consumers are not equipped to analyze and understand complicated insurance policies. Insurance regulators are able to review insurance policy forms to ensure that they benefit the consumer. Regulators also protect policyholders by setting coverage standards, specifying policy language for certain coverages, and rejecting contracts that do not meet with their approval

93
Q

Explain why maintain insurer solvency is an important goal of insurance regulation

A

Protecting policyholders against the risk that insurers will not be able to meet their financial obligations. Insurance consumers, even large commercial customers, may find it difficult to evaluate the financial strength and viability of private insurers

94
Q

Explain why avoiding destructive competition is an important goal of insurance regulation

A

Underpricing of insurance products to increase market share can lead to destructive competition by depressing price levels in the market as a whole. If prices fall too low, some insurers may become insolvent and some insurers may leave the market, leading to an insurance shortage. Regulators are responsible for determining that premium levels are high enough to avoid such destructive competition

95
Q

Identify the types of regulatory activities typically undertaken by state insurance departments

A

Approving policy forms, Holding rate hearings and reviewing rate filings, licensing new insurers, licensing producers, investigating policyholder complaints, rehabilitating or liquidating insolvent insurers, issuing cease-and-desist orders, conducting periodic audits of insurers, evaluating solvency information, performing market conduct examinations, fining insurers for violations of state laws, Publishing shoppers guides and other consumer information

96
Q

Identify the duties of a typical state insurance commissioner.

A
  • oversee state ins dept ops
  • promulgate orders, rules, regulations necessary to administer insurance law.
  • producer licensing
  • review pricing and coverage
  • conduct hearings on insurance issues
  • conduct financial and market examinations of insurers
  • annual report
  • maintain records
  • take action when law violated.
97
Q

What arguments do proponents of an elective system for insurance commissioners cite to support their position?

A

An appointed commissioner is subject to dismissal, while an elected commissioner is in office for an elected term; an elected commissioner would likely change the insurance department’s stance if a different approach is required, Elected officials are keenly aware of issues that are important to the public, An appointed commissioner might feel inclined to address the interests of those responsible for the appointment, while an elected commissioner is not obligated to special interest

98
Q

What are the arguments in favor of appointing insurance commissioners?

A

An appointed commissioner has no need to campaign and is not unduly influenced by political contributors, an appointed commissioner is less likely to be swayed by ill-informed public opinion, An appointed commissioner is more likely to be perceived as interested in regulation rather than in political advancement

99
Q

Describe the ways in which the NAIC affects the regulation of insurance

A

Developing model laws and regulations for enactment by state legislators, by sharing financial information about insurers, and by developing uniform financial statement forms required by all states

100
Q

What are the three criteria for a state insurance department to satisfy the NAIC Financial Regulations a standards and to be accredited?

A

1) laws and regulations must meet basic standards of NAIC models
2) state’s regulatory methods must be acceptable to the NAIC
3) The states insurance department practices must be adequate as defined by the NAIC.

101
Q

What arguments have been advanced in favor of federal regulation?

A

Federal regulation can provide regulatory uniformity across all states, Federal regulation would be more efficient, Federal regulation could attract higher-quality personnel

102
Q

What arguments have been advanced in favor of continued regulation by the states?

A

State regulation is more responsive to local needs, the NAIC can facilitate uniformity of state laws, State regulation allows for greater opportunities for innovation, State regulation is a known entity and its strengths and weaknesses have already been identified, state regulation results in a desirable decentralization of political power

103
Q

What requirements must be met to form a domestic stock insurance company?

A

Minimum capital and surplus requirements before a license is granted, Domestic insurers are licensed in the state in which they are incorporated

104
Q

What requirements must be met to form a domestic mutual insurance company?

A

Because a mutual insurer has no capital derived from the sale of stock, the minimum requirement applies only to surplus. Most states require mutuals to have an initial surplus equal to the minimum capital and surplus requirements for stock insurers writing the same types of business. Some states also require mutuals to have applications and deposit premiums from a state minimum number of person on more than a stated number of separate exposures with aggregate premiums in excess of a stated amount

105
Q

How do licensing requirements for brokers differ from those agents?

A

Both agents and brokers must pass an examination to be licensed in each state where they do business. In those states that issue a separate broker’s license, a different set of examinations may be used for brokers than for agents. Higher standards may also be imposed for a broker’s license than for an agent’s license

106
Q

What requirements must a person who wants to do business as an insurance consultant typically meet?

A

May require state licensing in some jurisdictions. Licensing requirements vary by state

107
Q

What methods do state regulators use to monitor and regulate insurer solvency?

A

Establishment of financial requirements, review of financial annual statements, IRIS, and onsite field examinations.

108
Q

What factors historically have contributed to insurer insolvencies?

A

Rapid premium growth, inadequate insurance rates and reserves, excessive expenses, lax control over managing general agents, uncollectible reinsurance, and fraud

109
Q

What are the goals of insurance regulations?

A

Ensure that rates are adequate, not excessive, and unfairly discriminatory.

110
Q

Briefly describe the advantages and disadvantages of prior approval insurance rating laws

A

Advantage:Rates must be approved before they can be used. Disadvantage: This may cause a delay in obtaining rate increase

111
Q

Briefly describe the advantages and disadvantages of file-and-use insurance rating laws

A

Advantage:the rate can be used immediately.
Disadvantage: Filing is still required and the state insurance dept may subsequently disapprove rates that violate state law.

113
Q

Briefly describe the advantages and disadvantages of use-and-file insurance rating laws

A

Advantage:the rate can be used immediately.
Disadvantage:Rates are then submitted to regulators for review.

114
Q

Briefly describe the advantages and disadvantages of flex rating laws

A

Advantage:Insurers may make changes in rates within an established range without prior approval. This allows insurers to make rate adjustments quickly in response to changing market conditions.

115
Q

Brielfy describe the advantages and disadvantages of open competition insurance rating laws

A

Under open competition, market forces determines rates. Rates must still meet the standards of being adequate, non-excessive, and non-discriminatory.

116
Q

What types of sales practices would cause a producer to be in violation of a state’s unfair trade practices act?

A

Producers who engage in dishonesty, fraud, misrepresentation, twisting, unfair discrimination, or rebating may be penalized under the state’s unfair trade practices act.

117
Q

What steps have insurance regulators taken in an effort to prevent solvency problems arising from improper underwriting practices?

A

Regulators have constrained insurers’ ability to accept, modify, or decline applications for insurance coverage and have limited the way in which insurers can divide consumers into rating classifications. Restrictions on the timing and reasons for cancellation and nonrenewals is another step that regulators have taken

118
Q

What types of claim activities are generally prohibited under state unfair claim practices laws?

A

Misrepresentation of important facts or policy provisions relating to the coverage at issue; the failure to attempt to pay claims in good faith where liability is reasonably clear, the attempt to settle a claim for less than the amount that a reasonable person believes he or she is entitled to receive based on advertising material; and the failure to approve or deny coverage of a claim within a reasonable period after a proof-of-loss statement has been completed

119
Q

What are some of the services that insurance advisory organizations provide to the insurance industry and its regulators?

A

Developing rating systems, collecting and tabulating statistics, researching topics important to the industry, and providing a forum for discussion of relevant issues. These organizations also educate insurers, regulators, and the public about issues and monitor regulatory issues of concern to their members

120
Q

How do state guaranty funds operate to pay the claims of insolvent insurers?

A

Guaranty funds are designed to mitigate the effects of insurer insolvencies rather than prevent such insolvencies. Once an insurer fails,all companies are accessed a share of the unpaid claims. All policies terminate in 30 days. NY pre-accesses for the claims.

121
Q

What are the limitations on guaranty funds as a solution to insurer insolvencies?

A

Claims are usually subject to the lesser of the policy limit or $300,000. A deductible applies. Claim payments are delayed.

122
Q

Identify four “unofficial regulators” that influence insurer activity.

A
  • Financial rating agencies
  • Insurance advisory organizations
  • Insurer trade organizations
  • Consumer organizations
123
Q

Describe two types of entities that rely on insurance company financial ratings and why the ratings are important.

A
  • Corporate risk managers, independent insurance agents and brokers, consumers and others consult these ratings when choosing an insurer.
  • Contractors and others are often required to furnish a certificate of insurance from a company with a specified minimum rating.
  • Banks and lending institutions require mortgagees to provide evidence of insurance from a company with a specified solvency rating.
124
Q

Explain which one of the following arrangements would be illegal under the Financial Services Modernization Act.

National Bank #1 starts an operating subsidiary to underwrite insurance. National Bank #2 starts an insurance affiliate under a bank holding company structure.

A

National Bank #1 cannot start an operating subsidiary to underwrite insurance because it would be too easy for a failing bank to tap insurance assets.

125
Q

Which one of the following is a result of destructive competition?

A. Products liability coverage unavailable in the 1980’s
B. Withdrawal of insurers from various states
C. Lack of development of new policy forms
D. Excessive rates and unreasonable profits

A

Products liability coverage unavailable in the 1980’s is a result of destructive competition.

126
Q

Commercial Insurance Brokerage (CIB) specializes in providing insurance and related services to larger commercial accounts. An important strategic initiative for the firm is to provide informed and timely responses to industry issues that affect their customers. Which one of the following professional and trade organizations would best be able to assist CIB with this initiative?

A. The American Insurance Association (AIA)
B. The National Association of Professional Surplus Lines Offices (NAPSLO)
C. The National Association of Professional Insurance Agents
D. The Council of Insurance Agents and Brokers

A

The Council of Insurance Agents and Brokers would best be able to assist CIB with providing informed and timely responses to industry issues that affect their customers.

127
Q

Every state insurance department is headed by a state insurance commissioner, a director appointed by the governor or elected by the voting public, or by a

A. Board of directors.
B. State board of trustees.
C. Superintendent.
D. Joint underwriting association.

A

In some states, the state insurance department may be headed by a superintendent.

128
Q

Which one of the following statements is correct with respect to a goal of rate regulation?

A. Rate regulation also prohibits “fair discrimination”.
B. The objective is that rates be equitable and reasonably similar among all classifications of risk.
C. If loss exposures are different in terms of expected losses and expenses, then different rates can be charged.
D. Age is not an appropriate factor on which to base any insurance rates.

A

If loss exposures are different in terms of expected losses and expenses, then different rates can be charged.

129
Q

Which of the following statements is correct with respect to the Gramm-Leach-Bliley Act?

A. The act prohibits bank-related firms from selling insurance on the same basis as insurers
B. It prohibits sharing of customer information between banks and their insurance affiliates.
C. The act allows national banks to underwrite insurance through an operating subsidiary.
D. Under the act, each segment of the financial services business is regulated separately.

A

Under the act, each segment of the financial services business is regulated separately.

130
Q

If an insurer disagrees with the insurance commissioner’s findings, generally it can file

A. For peer review
B. For judicial review.
C. A civil action.
D. A regulatory hearing request.

A

The insurer may file for judicial review when the insurer disagrees with the insurance commissioner.

131
Q

Taunton Insurance Company files its new auto policy with the state insurance department. The new policy includes several revisions in definitions and policy provisions. Taunton does not hear from the insurance department for several months. Which one of the following is true regarding the outcomeof the filing?

A. Taunton should wait on a decision from the state insurance department before using the new policy form.
B. Taunton must follow up with the state insurance department for a decision.
C. The policy is approved when it passes a specified period and it has not be disapproved.
D. The policy is disapproved when it passes a specified period and has not been approved.

A

The policy is approved when it passes a specified period and it has not be disapproved.

132
Q

If an insurer violates the unfair trade practices act, the insurer may be fined. The fine is often increased significantly if the activity is considered to be

A. Discriminatory.
B. Dishonest.
C. Misrepresentation.
D. Flagrant.

A

If the activity is carried out with conscious disregard for the law, it would be considered flagrant and the insurer could be subject to increased fines.

133
Q

If the activity is carried out with conscious disregard for the law, it would be considered flagrant and the insurer could be subject to increased fines.

Gulford, a small regional insurer, does not have a large internal staff to follow legislative updates or new regulations that the state insurance department may create. Which one of the following entities would best be able to assist the underwriting manager in remaining aware of these important topics?

A. Insurance association
B. Insurance advisory organization
C. Trade association
D. Financial rating organization

A

A trade association would best be able to assist the underwriting manager in remaining aware of these important topics.

134
Q

Every state has separate and equal branches of government. Which state branch of government implements the laws?

A. The executive branch.
B. The judicial branch.
C. The legislative branch.
D. The regulatory branch.

A

A. Executive branch

135
Q

Which one of the following statements is true, and illustrates an argument for appointing, rather than electing, an insurance commissioner?

A. An appointed insurance commissioner is not subject to dismissal during his first term.
B. Benjamin, an appointed insurance commissioner, is not swayed by recent press about increasing rates on homeowners policies, because he knows most insurers in his state need increases to stay solvent.
C. An appointed insurance commissioner is more likely to be keenly aware of issues currently important to the public.
D. Benjamin, an appointed insurance commissioner, yields to the interests of those responsible for appointing him, and carries out the desires of the special interest groups that supported him.

A

B. Benjamin, an appointed insurance commissioner, is not swayed by recent press about increasing rates on homeowners policies, because he knows most insurers in his state need increases to stay solvent.

136
Q

In which one of the following ways does the National Association of Insurance Commissioners (NAIC) have a profound effect upon the nature and uniformity of state regulation?

A. By establishing insurance guaranty associations
B. By providing a forum to develop uniform policy when appropriate
C. Through enactment of state laws relating to insurance regulation
D. Through enforcement of producer licensure rules and regulations

A

B. By providing a forum to develop uniform policy when appropriate

137
Q

Currently, all U.S. jurisdictions have unfair trade practices acts, with the exceptions of American Samoa and

A. The Virgin Islands.
B. Puerto Rico.
C. Guam.
D. Alaska.

A

C. Guam.

138
Q

A goal of rate regulation requires that

A. An insurer should charge all applicants for a particular type of insurance the same rates.
B. Insurers in a territory should all charge similar rates for loss exposures that are similar in terms of losses and expenses.
C. An insurer should charge all insureds within a particular rating territory substantially similar rates.
D. Loss exposures that are roughly similar regarding expected losses and expenses should be charged substantially similar rates.

A

D. Loss exposures that are roughly similar regarding expected losses and expenses should be charged substantially similar rates.

CPCU 520 (10 decks)

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