Government Insurance Flashcards
TRIA
Terrorist Risk Insurance Act - a federal reinsurance mechanism designed to ensure availability and affordability of coverage to commercial insurance customers
Responsibilities of Federal Insurance Office
Analyze and report industry data (to the president & senate committees on financial services & banking)
Monitor systemic risks in the insurance industry
Ensure insurance accessibility to underserved communities
Represent the US in international insurance matters
Advises Secretary of the Treasury on insurance matters & coordinates stress testing
Policy goals and objectives of NFIP
Provide Access to primary flood insurance
Mitigate & Reduce flood risk through floodplain management standards
Risk-based premiums (incentive to mitigate risk)
Affordability
Sustainability (cover costs & exp)
High Participation rates
Non-insurance goals of NFIP
social goal: provide coverage to high-risk customers who would not be able to find private flood insurance
Distribute flood maps to assist with risk management
Require land use and building standards
Reduce need for other post-flood disaster aid
Fund rebuilding after a flood
Protect lenders against mortgage defaults due to uninsured losses
Issues & barriers to private Flood Insurance (with current NFIP structure)
Coverage must be “at least as broad” as NFIP
Continuous coverage requirement
Non-compete clause (WYO cannot sell NFIP-type policies) (removed beginning 2019)
NFIP subsidized rates hard to compete with
Regulatory uncertainty
Accurate assessment of flood risk (credible data)
Participation rates must be high to spread risk
Effects of Increased Private Flood Insurance
Good:
More choice for consumers
Potentially lower prices
Bad:
Variable protections
Adverse selection (private take all the low-risk, NFIP gets high-risk)
Impaired flood mapping and floodplain management
Terrorism Loss Sharing Criteria (7)
[1] certification
- terrorist act must be certified
- certification is done by Secretary of the Treasury (SOT), Secretary of Homeland Security (SOHS), Attorney General (AG)
- losses must be ≥ $5 million in the United States, air or sea vessles
[2] federal government threshold
- aggregate industry losses ≥ $200 million for federal assistance to begin
[3] coverage
- covers only commercial P&C
[4] deductibles
- insurer’s deductible = 20% of direct earned premium
[5] coinsurance
- insurer pays 20% of losses above deductible
[6] federal government limit
- no federal coverage for aggregate losses ≥ $100 billion
- insurers are not required to provide coverage beyond this limit
[7] surcharges
- SOT (Secretary of Treasury) must establish surcharges to recoup 140% of federal outlay when aggregate losses are ≤ $37.5 billion
- for aggregate losses > $37.5 billion, the SOT may establish surcharges but it is not mandatory
Reasons for Government Insurance (FCCES)
Filling needs unmet by private insurance (TRIA)
Compulsory (WC)
Convenience of administration & service (NFIP)
Efficiency of cost (no advertising or agents fees)
Social purposes (Medicare)
Evaluation criteria of government insurance
Is is one of welfare or insurance?
Does it achieve social purposes?
Is it efficient?
Is it accepted by the public?
Is it necessary?
List & type of gov’t-participating insurance programs
Crop insurance - reinsurance & premium subsidies
Workers comp - 4 exclusive state funds, 19 competitive with private
Flood insurance - primary provider (some private involvement in reins or primary ins)
Unemployment insurance - shared responsibility between federal and state
Social Security - retirement, disability, and survivor benefits funded by payroll taxes
TRIA - fed reinsurance
Guaranty funds - protect policyholders in the event of insurance company insolvency
Ways insurance companies are regulated by states
financial regulation:
- capital requirements
- restrictions on investments
market conduct:
- sales & advertising
- underwriting
- claims handling
licensing:
- insurer licensing
- producer licensing
Identify 4 insurance programs with federal involvement & identify the role of government
social security:
- federal government is the sole provider
NFIP: (National Flood Insurance Program)
- federal government acts as reinsurer
- private insurers market and service policies
crop insurance:
- federal government acts as reinsurer (private insurers market and service policies)
TRIA:
- federal government share costs with private insurers according to rules
3 advantages of federal regulation & 3 advantages of state regulation
Federal:
Efficiency: less duplication of effort for regulator & insurer (versus multiple state reguators)
Uniformity: uniform regulations across U.S. facilitate entry/exit to/from states
Single contact point: facilitates dealings with international markets
State:
Local knowledge: state regulators understand state-specific populations & risk factors
Responsiveness: regulations can respond quickly to state-specific politics & economics
Redundancy: duplication of oversight across states increase likelihood of detecting weak insurers, taking corrective actions
Terrorism insurance programs in other countries
Spain: government-owned reinsurer that has provided coverage for catastrophes since 1954
U.K.: privately owned mutual insurance company with government backing (Pool Re)
Germany: private insurer with government backing
Canada: considered, creating a government program following September 11, 2001, but was ultimately rejected
Nuclear / Biological / Chemical / Radiological TRIA coverage
not explicitly included or excluded so should be covered by TRIA
but most primary policies covered by TRIA have exclusions for NBCR
note that NBCR coverage has never been legally tested
Cyberterrorism is included but only 50% of standalone cyber policies include terrorism
