Gov't and Industry Insurance Programs Flashcards
What are some reasons for government participation in insurance?
- Filling insurance needs unmet by private insurance
- Compulsory purchase of insurance
- Convenience
- Greater efficiency
- Social purposes
Govt Study Note pg1
As compared to private insurers, how can the government (state or federal) be involved in an insurance market?
As exclusive insurer
or partner with private insurers
or compete with private insurers
Govt Study Note pg4
What is an example of the federal government acting as exclusive insurer?
Social Security
Govt Study Note pg4
What is an example of state governments acting as exclusive insurer?
Some state government-run workers compensation programs
Govt Study Note pg4
How does the government partner with private insurance companies?
The government offers reinsurance coverage on specific loss exposures for which the private insurer may retain only a portion of the loss.
Govt Study Note pg4
What are some examples of the federal government partnering with private insurance companies?
The National Flood Insurance Program
TRIA
Federal Crop Insurance
Govt Study Note pg4
What are some examples of state governments partnering with private insurance companies?
Fair Access to Insurance Requirements (FAIR plans)
Workers Compensation
Windstorm plans
Residual Auto Plans
Govt Study Note pg4
What is an example of state governments in competition with private insurance companies?
Some state’s workers compensation plans
Govt Study Note pg4
Why was the National Flood Insurance Program established?
The private insurers were not supplying flood insurance to the private market
Govt Study Not pg4
What is a guaranty fund?
A guaranty fund (also called a guaranty association) is a state fund that provides a system to pay the claims of insolvent insurers. It is generally funded by assessments collected from all insurers licensed in the state.
Porter 12.12
What is a post-insolvency assessment?
It is an approach to funding claims in which a state guaranty fund estimates the claims it must pay after an insolvency and issues assessments for this obligation to solvent insurers operating in the state.
Porter 12.12
What do guaranty funds pay for?
Most claims that would have been due under insolvent insurers’ policies and a portion of insolvent insurers’ unearned premium.
12.13
What are some guaranty fund coverage limitations under the NAIC’s Post-Assessment Property and Liability Insurance Guaranty Association Model Act?
- Lines Covered. Most property-liability policies, if issues by insurers licensed to transact insurance in that state, are covered. Title, credit, mortgage, and ocean marine are almost always excluded, and all reinsurance and surplus lines contracts are excluded.
- Refunds of unearned premium. Most states cover the return of unearned premium, often with a stated limit per policy
- Maximum covered claim (cap). The model act calls for a stated limit per policy claim, except for workers compensation, which provides unlimited statutory benefits
- Claim deductibles. The model act requires a stated deductible per covered claim over any policy deductibles
- Large net worth deductible. Many states have adopted a special deductible for insureds with large net worth. The deductible is a stated percentage of those insureds’ net worth.
- Trigger of coverage. For most states, fund coverage becomes available for an insured only after a court has found that insurer to be insolvent and has put it into liquidation.
Porter 12.13
How does the NAIC model act allow for guaranty fund boards to prevent insolvencies?
The guaranty fund board can make recommendations to the commissioner on insolvency protection and participate with the commissioner in the correction of a financially hazardous member insurer.
Porter 12.13
Who is not covered by a guaranty fund?
Guaranty funds do not cover unlicensed insurers, such as excess and surplus lines insurers.
Porter 12.14
Why do critics question the ability of post-insolvency guaranty funds to pay for CAT losses?
Why does the NAIC disagree?
In most states, annual assessments cannot exceed a small percentage, such as 2%, of premiums written in the state..
Although this percentage of premium cap is occasionally paid out quickly, as with payments for insolvencies caused by a record number of claims following natural disasters, industry and NAIC studies have found that state funds generally have had ample capacity to meet reasonably foreseeable insolvencies.
Porter 12.14
How can insurers shift some of their guaranty fund assessment costs on to the public?
Insurers can attempt to pass on their assessment costs to their policyholders in their rates. Additionally, many states allow a credit for assessment against premium taxes owed by members of guaranty funds.
Porter 12.14
They high costs of paying for insolvencies through guaranty funds motivate insurers to promote strong financial regulation. What are two reason the price for insolvencies is high?
- Insurers are assessed directly for guaranty fund operation
- Competition is distorted. Insurers that are aggressively marketing or loosely underwriting can gain a greater market share, compared with more conservatively managed insurers.
Porter 12.17
How do consumers benefit from guaranty funds?
For consumers with claims, instead of waiting their turn to receive a fraction of a dollar, as under federal bankruptcy laws, they get the total value of most claims paid promptly.
Some consumers benefit from risky underwriting behavior, such as the high-risk driver who obtains insurance at standard rates from an insurer aggressively seeking to expand.
Porter 12.17
How do consumers pay for guaranty funds?
Consumers cost is hidden. Insurers pass on the cost of assessment to consumers in their rates.
Porter 12.17
Why was the Terrorism Risk Insurance Act of 2002 (TRIA) enacted by Congress?
After 9/11, terrorism insurance was either extremely expensive or not offered at all by individual private insurers.
Webel Summary
What change was made to TRIA when it was extended in 2007?
TRIA was amended to cover not only foreign terrorism but also domestic terrorism.
Webel Summary
What did the Terrorism Risk Insurance Act of 2002 create?
TRIA created a temporary three year Terrorism Insurance Program in which the government would share some of the losses with private insurers should a foreign terrorist attack occur.
Webel Summary
What does TRIA require of insurance companies?
TRIA requires that insurance companies make terrorism coverage available to commercial policy holders.
TRIA does NOT require policyholders to purchase terrorism coverage.
Webel Summary
How does the amount of government loss sharing vary by size of insured loss under TRIA?
- For a relatively small loss, private industry covers the entire loss.
- For a medium sized loss, the federal role is to spread the loss over time and over the entire insurance industry; the govt assists insurers initially but then recoups the payments through a broad levy on insurers afterward.
- For a large loss, the federal govt would cover most of the losses, although recoupment is possible in these circumstances as well.
Webel Summary
Has TRIA helped make commercial terrorism risk coverage available?
Yes. Since TRIA’s passage, the private industry’s willingness and ability to cover terrorism risk have
increased. According to industry surveys, prices for terrorism coverage have generally trended
downward, and approximately 60% of commercial policyholders have purchased coverage over
the past few years
Webel Summary
What are the 3 stated goals of TRIA 2002?
(1) create a temporary federal program of shared public and private compensation for insured terrorism losses to allow the private market to stabilize;
(2) protect consumers by ensuring the availability and affordability of insurance for terrorism risks; and
(3) preserve state regulation of insurance
Webel pg2
How did TRIA address it’s second goal, to protect consumers?
By requiring those insurers that offer the lines of insurance covered by TRIA to make terrorism insurance available prospectively to their commercial policyholders. This coverage may not differ materially from coverage for other types of losses.
Webel pg4
Although TRIA’s 3rd goal is to preserve state regulation of insurance, there are a few exceptions included in the initial legislation. What are they?
(1) the federal statute preempts any state definition of an “act of terrorism” in favor of the federal definition and
(2) state rate and form approval laws for terrorism insurance were preempted from enactment to the end of 2003.
(3) preempts state laws with respect to insurance policy exclusions for acts of terrorism
Webel pg5
How has the administration of TRIA program changed over time?
Originally, the administration of the TRIA program was left generally to the Secretary of the Treasury.
After the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, this act created a new Federal Insurance Office (FIO) to be located in the Department of the Treasury, which assists the Secretary in the administration of the Terrorism Insurance Program
Webel pg5
Are Nuclear, Chemical, Biological, and/or Radiological (NCBR) terrorism events covered by TRIA?
TRIA does not explicitly include or exclude NCBR events. However, many underlying policies exclude NCBR events, whether terrorism or otherwise. Because TRIA only covers insured losses, the underlying policy exclusions would limit TRIA’s coverage.
Webel pg5
Why do some believe that terrorism is not an insurable risk?
Terrorism losses are not fortuitous or accidental.
Terrorism losses can be catastrophic.
Webel pg6
How can a government create the financial capacity to subsidize losses that private insurers cannot?
Either by directly taxing taxpayers for the insurance program, even those who do not benefit from the program, or indirectly by charging less than the actuarial cost of providing insurance coverage for the exposure and making up the difference through government-provided funds (crop/flood).
Govt Study Note pg1
What makes Crop and Flood insurance available and affordable?
Crop and Flood insurance is available and affordable only because of subsidies from the federal government.
Govt Study Note pg2
What are some examples of state legislatures offering insurance to individuals who could not find a private market for compulsory insurance?
The workers compensation state funds established in several states and the Maryland Automobile Insurance Fund are examples.
Govt Study Note pg2
What are two reasons why some federal and state legislators believe that government should provide compulsory insurance?
- Some individuals might not be able to find a private market.
- private companies should make only limited profits, given the government guaranteed market; govt would act as a not-for-profit insurer to keep cost of compulsory insurance down.
Govt Study Note pg2
How is ‘convenience’ used as a justification for government involvement in insurance?
It is easier for the government to set up a program quickly as a legislature can appropriate funding for the new program, whereas the private market may take longer to find the necessary funding.
Also a govt program may already be set up to provide certain types of services needed by the insurance program; e.g. loss mitigation development and funding (Florida Hurricane Cat Fund)
Govt Study Note pg3
Why might the cost savings claimed for government insurance programs as compared to private insurance be overstated?
Other government departments may perform services on behalf of the govt insurance entity that are usually performed by insurance companies, including appraising property, administering claims, or making investments.
Govt Study Note pg3
What questions should be asked in assessing the effectiveness of government insurance programs?
- Is the provision of the insurance by the govt necessary or does it achieve a social purpose that cannot be provided by private insurance?
- Is it insurance or a social welfare program?
- Is the program efficient, is it accepted by the public?
Govt Study Note pg4
How does the Federal Crop Insurance Program work?
Operated by FCIC, wholly owned corp of the USDA. Private insurers sell and service the insurance policies, and the losses are reinsured by the federal govt.
In addition to reinsuring the losses, the govt subsidizes the premium paid by the participating farmers and reimburses the participating insurers for their administrative costs.
Govt Study Note pg5
What are some criticisms of the Federal Crop Insurance Program that led to its overhaul by the Agricultural Risk Protection Act of 2000?
Many farm groups felt that the crop insurance program did not provide adequate coverage when natural disasters occurred.
Opponents of the federal crop insurance program felt that the subsidies provided by the government encouraged overproduction.
Govt Study Note pg5
What changes did the Agricultural Risk Protection Act of 2000 (ARPA) make to the federal crop insurance program?
ARPA increased the portion of the premium paid by the federal govt and improved the coverage available to farmers affected by multiple years of natural disasters.
Govt Study Note pg5
Why did the Agricultural Risk Protection Act of 2000 (ARPA) increase premium subsidies for the federal crop insurance program?
ARPA increased premium subsidies for the federal crop insurance program to encourage higher levels of coverage.
Govt Study Note pg6
What goal did the Agricultural Risk Protection Act of 2000 (ARPA’s) increase in subsidies accomplish?
The subsidies increased participation in the program at higher levels of coverage.
Govt Study Note pg6
What changes have been made and proposed to the federal crop insurance program since ARPA?
The Risk Management Agency (RMA) revised the reinsurance agreements to lower the reimbursement rate to insurers for administrative and operating expenses and a rebalancing of the risk shared by the govt and private insurers.
In order to receive farm program benefits a participant would need to purchase crop insurance protection for at least 50% of the expected market value.
Govt Study Note pg6
How do both employees and employers benefit from workers compensation insurance?
Employees do not have to sue their employers to get compensation.
Employers exchange an uncertain, potentially large payment, for a certain guaranteed benefit system.
Govt Study Note pg7
What is the Federal Employee Compensation Act (FECA)?
The Federal Employee Compensation Act (FECA) provides compensation benefits to non-military, federal employees for disability due to personal injury sustained while in the performance of duty and for employment-related disease.
The act is the exclusive remedy for federal civilian employees who suffer occupational injury or illness.
Govt Study Note pg7
What is the purpose of the Federal Employee Compensation Act (FECA)?
The program’s purpose is to return individuals to work while containing the costs of the system.
Costs of the system are contained because no judicial review and limited employer ability to contest claims, ergo the program has limited administrative and litigation costs.
Govt Study Note pg7
Does the Federal Employee Compensation Act (FECA) achieve its goal of low administration costs when compared to similar state-run systems?
Yes. % administration costs are lower in the federal program than compared to similar state programs.
However, the average benefits paid within the FECA system are substantially higher than state WC systems, leading to relatively low admin percentages.
Govt Study Note pg7
Why was the Longshore and Harbor Workers’ Compensation Act of 1927 enacted?
The act was created to provide workers’ compensation coverage for categories of workers who were not seamen and were injured while working on or near navigable water in the US and for which no state act coverage applied.
Govt Study Note pg8
