Chapter 2 Flashcards
3 reasons insurance industry is regulated
- to protect consumers
- to maintain insurer solvency
- to protect against destructive competition
why is protecting insurer solvency important?
-protects insureds against the risk that they will be unable to meet their financial obligations
reasons for maintaining a sound financial condition
- Insurance provides future protection
- Regulation is needed to protect the public interest
- Insurers have a responsibility to insureds
- Insurers have become insolvent despite regulatory reviews
why is it important to protect consumers?
- Hard for consumers to inspect legal documents
- Regulators protect consumers by reviewing insurance policies
- States can also set consumer protection laws (coverage standards and specify policy language
what is destructive competition?
Basically to stop people from pricing their coverage with super low premiums
why is protecting against destructive competition important?
- When this happens others do it and some end up under-pricing and become insolvent
- Then an insurance shortage can develop and no one can obtain the coverage they need
National Association of Insurance Commissioners (NAIC)
- a nonprofit corp. that has no regulatory authority of its own, but plays an important coordinating role
- Commissioners from all 50 US states, DC, and 5 US territories
- Purpose is to coordinate insurance regulation activities among the various state insurance departments
what is the major source of funding for state regulation?
premium taxes (audit, filing, and licensing also contribute)
state insurance departments:
- Fall in the executive branch of gov.
- Enforce insurance laws enacted by legislatures
the insurance commissioner
- Issuing an annual report on the status of the state’s insurance market and insurance department
- Doesn’t personally handle most duties but delegates
- Some are appointed by the governor, some are elected
- decides whether applicants are approved
Model law
- 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
- Helps with uniformity in laws across the states
- State legislatures consider these when writing new laws
Model regulation
a draft regulation that may be implemented by a state insurance department if the model law is passed
Federal Regulation
- As employers, insurers are subject to federal employment laws
- As businesses that sell their stock to the public to raise capital, stock insurers are subject to regulations like any other such business
Insurance Fraud Protection Act (1994)
- Protects consumes and insurers aginst insolvencies resulting from insurance fraud
- Prohibits anyone with a felony conviction involving trustworthiness from working in the insurance business unless he or she secures the written consent of an insurance regulator
- Makes it illegal for insurers, reinsurers, producers, and others to employ a person who has a felony conviction involving breach of trust or dishonesty
Domestic insurer
- an insurer doing business in the jurisdiction in which it is corporated
- License generally has no expiration date
- Generally must meet the conditions imposed on corps. Engaged in noninsurance as well as some special conditions
Foreign insurer
- an insurer licensed to operate in a state but incorporated in another state
- License generally must be renewed annually
- Must first show that it has satisfied the requirements of its home state
- Then it must satisfy the minimum capital, surplus, and other requirements imposed on the state’s domestic insurers
Alien insurer
- an insurer domiciled in a country other than the US
- License generally must be renewed annually
- Must satisfy the requirements imposed on domestic insurers by the state in which they want to be licensed
- They also must usually establish a branch office in any state and have funds on deposit in the US equal to the minimum capital and surplus required
Applicants for licenses must
o Apply for a charter
o Provided the names/addresses of the incorporators
o Name of the proposed corp.
o Territories and types of insurance it plans to market
o The total authorized capital stock (if any)
o Its surplus
An insurer must be financially sound
- State laws require that insurers satisfy certain minimum capital and surplus requirements before a license is granted (capital stock and paid-in-surplus)
- Vary a lot between states (as little as $100,000 or as much as $15 mil)
Capital stock
a balance sheet value that reps the amount of funds that a corp.’s stockholders have contributed through the purchase of stock
Paid-in surplus
the amount stockholders paid in excess of the par value of the stock
Reciprocal (mutual) insurer
an insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member
requirements for mutual insurers
-Minimum financial requirement applies only to surplus because a mutual insurer does not have capital derived from the sale of stock
-Initial surplus can come from premium deposits made by prospective policyholders or a portion of the initial surplus may be borrowed
-Many states require a minimum number of applications with deposit premiums for a minimum number of separate loss exposures and aggregate premium exceeding a specific amt. (guarantees some stability before it begins operations)
Proposed name must include “mutual
Non-admitted insurer
- Not licensed in its home state
- May be an admitted insurer in other states or even an alien insurer
- Typically a surplus lines insurer
- Basically consumers who are denied by admitted insurers (for being to risky) can purchase insurance from non-admitted insurers
typical non-admitted insurer consumers
- Distressed risks: have underwriting problems
- Unique risks: difficult to evaluate
- High capacity risks: require very high coverage limits
Might be able to transact business through a specially licensed surplus lines producer if
- The insurance is not readily available from admitted insurers
- The non-admitted insurer is acceptable
- The producer has a special license authorizing him or her to place such insurance
- (surplus lines producer must generally be a resident of the state)
+/- of non-admitted insurers
perks: less regulation
bummers: not usually protected by the state’s guarantee fund
Risk Retention Group
- special type of assessable mutual insurer
- often formed under state captive laws (lower capital and surplus requirements)
- once licensed as a commercial liability insurer under the laws of at least one state, a risk retention group can write insurance in other states without a license by filing the appropriate notice and registration forms with the nonchartering state
- can only write commercial liability insurance for its members
- might be subject to unfair claim settlement practice laws and premium taxes in nonchartering state
- may also be required to join a joint underwriting association with which insureers share losses in such areas as assigned-risk auto insurance
- licensing state can request and if necessary mandate an examination of a group’s financial condition
Producers
- Must be licensed in each state where they do business
- Must pass a written exam
- Subject to civil and criminal penalties if operating without a license
- Producers have concerns about lack of uniformity between states for licensing requirements
Claim Reps
-Some states require these guys to be licensed so that those who make claim decisions for insurers are aware of prohibited claim practices, have a minimum level of technical knowledge and skill, and understand how to handle insureds’ claims fairly
-Licensing requires
o An exam
o Background check
o Ethics requirements
Insurance consultants
- Give advice, counsel, or opinions about insurance policies
- Some states require them to be licensed
- Generally separate exams for life-health insurance and property-casualty insurance
Methods to maintain solvency
- Regulatory system framework relies on an extensive system of peer review to provide the necessary checks and balances
- Insurance regulators must have appropriate regulatory authority and be able to operate independent of undue influence from insurers or other groups
- Uniformity of approach to financial regulator has been facilitated by the NAIC accreditation program
Insolvency:
- a situation in which an entity’s current liabilities (as opposed to its total liabilities) exceed its current assets
- If an insurer falls into insolvency the insurance commissioner places it in receivership
state guarantee fund
- 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
- Do not prevent insurer solvency, but mitigate its effects
- All states have property-casualty guaranty funds
Common characteristics of guarantee funds:
- Assessments are made only when an insurer fails (Except in NY)
- Policies usually terminate within thirty days after the failure date
- Claim coverage varies by state
- Claims are subject to maximum limits
- Most states provide for a refund of unearned premiums
- Most states apply a $100 deductible to unpaid claims
- Most states divide their guaranty funds into separate accounts (usually auto, workers comp., etc)
- Assessment recovery varies by state
why do co.s commonly go insolvent
usually its from poor management and adverse effects
goals for rating agencies
- adequate
- not excessive
- not unfairly discriminatory
adequate
Rates for a specific type of insurance should be high enough to pay all claims and expenses for that type of insurance
Factors to consider when determining if its excessive
- Number of insurers selling a specific coverage in the rating territory
- Relative market share of competing insurers
- Degree of rate variation among the competing insurers
- Past and prospective loss experience for a given type of insurance
- Possibility of catastrophe losses
- Margin for underwriting profit and contingencies
- Marketing expenses for a given type of insurance
- Special judgment factors that might apply to a given type of insurance
not unfairly discriminatory
- Insured with loss exposures that are roughly similar regarding expected losses and expenses should be charged substantially similar rates
- Computers complicates this
- Fair discrimination is still fine
file and use laws:
allow the insurer to use the new rates immediately after filing with the state insurance department
flex rating laws:
require prior approval only if the new rates exceed a certain percentage above (and sometimes below) the rates filed previously
use and file laws
variation of file and use laws) allow insurers to use the new rates and later submit filing info that is subject to regulatory review
Courts
-Influence insurers by determining whether insurance laws are constitutional and whether administrative rulings/regulations are consistent with the state law
-Interpret confusing policy provisions
-Determine whether certain losses are covered by the policy
Resolve disputes btw insurers and insureds
who decide unfair trade practice law cases?
the state commissioner
outcomes for breaking unfair trade practice law cases
- fine per violation
- suspension or revocation of license
good-faith claims handling
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
bad faith (outrage)
a breach of the duty of good faith and fair dealing
Insurance advisory orgs
- Independent orgs that work with and on behalf of insurers that purchase or subscribe to its services
- Provide data on prospective loss costs (loss data that are modified by loss development, trending, and credibility processes, but w/o considerations for profit and expenses)
- Basically they provide a lot of research and data and monitor issues of concern to their members
Insurance industry professional and trade associations
- Share a common profession
- Main goal is to advance success of members and uphold ethical standards
- Basically a business frat for your profession (think NACMA)
Consumer groups
- Work for change in the insurance industry or monitor insurers and their actions
- Consumer Federation of America
