Chapter 8 - Government Regulation Flashcards
What are the four reason for insurance regulation?
- Maintain insurer solvency
- compensate for inadequate consumer knowledge
- ensure reasonable rates
- make insurance available
In 1851, New Hampshire was the first state to create what?
to create a separate insurance commission to regulate insurers
What was the legal significance in Paul v. Virginia (1868)?
The supreme court ruled that insurance was not interstate commerce, and that the states rather than the federal government had the right to regulate the insurance industry.
What court case ruled that insurance was interstate commerce when conducted across state lines and was subject to federal antitrust laws?
U.S. v. South-Eastern Underwriters Association (1944)
SEUA was a cooperative rating bureau that was found guilty of price fixing and other violations of the Sherman Antitrust Act.
What was the legal significance in the McCarran-Ferguson Act (1945)?
This stated that continued regulation and taxation of the insurance industry by the states are in the public interest. It also stated the federal antitrust laws app;y to insurance only to the extent that the insurance industry is not regulated by state law.
What was the legal significance in the Financial Modernization Act (1999), (Also called the Gramm-Leach-Bliley Act)?
Th e legislation changed federal law that earlier prevented banks, insurers, and investment firms form competing outside their core area. As a result, State insurance departments regulate insurers, state and federal bank agencies regulate banks, the SEC regulates the sale of securities, and the Federal Reserve has umbrella authority over bank affiliates that engage in underwriting insurance
What are the three principal methods used to regulate insurers?
- Legislation, through both state and federal laws
- court decisions, interpreting policy provisions
- state insurance departments
What are six subjects that are regulated under law?
- formation and licensing of insurers
- solvency regulation
- rate regulation
- policy forms
- sales practices and consumer protection
- taxation of insurers
What three requirement must be met after a insurer receives a charter or certificate of incorporation from the state?
- must meet certain minimum capital
- surplus requirements
- subject to other financial regulations designed to maintain solvency
What are the four regulations designed to maintain solvency?
- Assets must be sufficient to offset liabilities
- Admitted assets are assets that an insurer can show on its statutory balance sheet in determining its financial condition
- states have regulations that address the calculation of reserves (liabilities)
- an insurer’s surplus position is carefully monitored by state regulators
To reduce the risk of insolvency, life and health insurers must meet certain risk-based capital standards based on a model law developed by the NAIC. Define risk-based capital (RBC).
insurers must hold a certain amount of capital, depending on the riskiness of their investments and insurance operations
What are the four risk-based capital requirements in life insurance?
- asset risk, default of assets for affiliated investments
- underwriting risk or insurance risk, reflects the amount of surplus needed to pay excess claims because of random fluctuations and inaccurate pricing for future claim levels
- interest rate risk
- business risk
A comparison of the company’s _____ ______ ____ to the amount of required risk-based capital determines whether company or regulatory action is required.
Total adjusted capital
What is the purpose of investment regulations?
to prevent insurers from making unsound investments that could threaten the company’s solvency and harm the policy-owners
Laws generally place a limit on the proportion of assets in a specific asset category, such as real estate
Many states limit the amount of surplus a participating life insurer can accumulate, rather than pay as _____.
Dividends
Each insurer must file an ____ ____ with the state insurance department in the states where it does business.
annual report
If an insurer is financially impaired, the state insurance department assumes control of the company. All state states have what three things to pay the claims of policy-owners of insolvent insurers?
- guaranty funds
- guaranty laws
- guaranty associations
What does the assessment method do?
major method used to raise the necessary funds to pay unpaid claims
What are the seven forms of rating regulation for property and casualty insurance?
- prior-approval law
- modified prior-approval law
- file-and-use law
- use-and-file law
- flex-rating law
- state-made rates
- no filing required
What exempts insurers from filing rates and policy forms for large commercial accounts with the state insurance department for approval?
Commercial lines deregulation
____ ______ ____ are not directly regulated by the states.
Life insurance rates
Insurance contracts are technical and complex. State insurance commissioners have the authority to approve or disapprove new policy forms before the contrasts are sold to the public. What is the purpose of this?
To protect the public from misleading, deceptive, and unfair provisions
Insurance laws prohibit a variety of what three unfair trade practices?
- misrepresentation
- twisting
- rebating
What is twisting?
the inducement of a policy-owner to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client
What is rebating?
is the practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy.
What are three advantages of Federal Regulation?
uniformity of laws
greater efficiency
more competent regulators
What did the Insurance Industry Competition Act of 2009 do?
amended the McCarran-Ferguson Act by eliminating the federal antitrust exemption for the insurance industry.
What are two arguments that the critics had against the McCarran-Ferguson Act?
the insurance industry no longer needs broad antitrust exemption
federal regulation is needed because of the defects in state regulation.
What are three counterarguments regarding the repeal of the McCarran-Ferguson Act?
The insurance industry is already competitive
small insurers may be harmed
insurers may be prevented from developing common coverage forms
Proponents for federal regulation argue that federal regulation do what four things?
- Would provide uniformity in state regulations
- Is more effective in negotiation of international insurance agreements
- Is more effective in the identification and treatment of systemic risk
- Would enable insurers to become more efficient
What are six advantages of state regulation?
- Quicker response to local insurance problems
- Federal regulation could lead to a dual system of regulation and increase costs
- Poor quality of federal regulation, e.g., in the banking industry
- Reasonable uniformity of laws can be achieved by the model laws of the NAIC
- Greater opportunity for innovation
- Unknown consequences of federal regulation
What are four disadvantages of state regulation?
- Inadequate protection of consumers
- Improvements needed in handling complaints
- Inadequate market conduct examinations
- Insurance availability
The Dood-Frank Wall Street reform and Consumer Protection Act (2010) contained numerous provisions to reform the financial services industry; to deal with the destabilizing practices of commercial banks, investment firms, mortgage companies, and credit rating agencies; and to provide protection from consumers. What other two things did this act create?
- Created the Financial Stability Oversight Council: to identify and treat systemic risk
- Created the Federal Insurance Office
The Federal Insurance Office has the authority to do what five things?
- Monitor all aspects of the insurance industry
- Identify gaps in insurance regulation and identify issues that contribute to systemic risk
- Assist the FSOC in identifying insurers that could create systemic risk
- Represent the federal government in international discussions of insurance regulation
- Negotiate international agreements with foreign countries that pertain to insurance regulation.
what are three characteristics of an optional federal charter?
- Proposals would allow insurers to choose either a federal or state charter.
- Proponents argue that national insurers are at a competitive disadvantage under the present system.
- Creates a dual system of insurance regulation which will increase the cost of insurance regulation
What are nine reasons for insolvency of insurers?
- Inadequate rates
- Inadequate reserves for claims
- Rapid growth and inadequate surplus
- Problems with affiliates
- Overstatement of assets
- Alleged fraud
- Failure of re-insurers to pay claims
- Mismanagement
- Catastrophic losses
What are six methods of ensuring insolvency?
- Financial requirements, such as minimum capital and surplus requirements
- Risk-based capital standards
- Review of annual financial statements
- Field examinations
- Early warning system (IRIS ratios)
- FAST system analysis
The majority of insurers use the ____ ___ _____ for purposes of underwriting and rating in auto and homeowners insurance.
applicant’s credit record
What are two arguments that proponents of credit-based insurance?
- There is a high correlation between an applicant’s credit record and future claims experience
- Most consumers have good credit scores and benefit from credit scoring
What are two arguments that critics of credit-based insurance argue?
- The use of credit data in underwriting or rating discriminates against minorities and other groups
- Credit-based insurance scores may penalize consumers unfairly during business recessions
What is the purpose of retaliatory tax laws?
The purpose of a retaliatory tax law is to protect domestic insurers in the state from excessive taxation by other states where they do business.
Ex: assume that the premium tax is 2 percent in Nebraska and 3 percent in Iowa. if insurers domiciled in Nebraska are required to pay a 3 percent premium tax on business written in Iowa, then domestic insurers in Iowa doing business in Nebraska even though Nebraska’s rate is 2 percent
