History of Insurance Regulation

Question 1

What are the regulatory pillars of the National Association of Insurance Commissioners (NAIC)?

Answer 1

1. Protect the consumers
2. Ensure free and open competition
3. Promote the reliability and financial solvency of insurer’s
4. Support state regulation

Question 2

What are the primary functions of insurance regulations?

Answer 2

1. Insurer Licensing: insurers required to obtain licenses from the state before selling their products in the state
2. Producer Licensing: brokers and agents required to obtain licenses from the state before selling insurance products in the state
3. Product Regulation: state regulators must ensure products comply with state laws, are fair and reasonable, and do not contain major coverage gaps which may be misunderstood by insureds
4. Market Conduct: state regulators must ensure consumers are charged fair and reasonable insurance prices and that insurers operate in ways which are fair and legal
5. Financial Regulation: state regulators verify the accuracy of insurer financial statements and evaluates insurers for financial impairment which could result in insolvency
6. Consumer Services: state regulators must protect consumer rights

Question 3

Why was New York significant for early insurance regulation?

Answer 3

1. Required insurers to file annual financial statements to monitory solvency
2. Created first department of insurance (DOI)
3. Established process for managing insurer liquidation

Question 4

What was the Paul v. Virginia (1869) case and why was it significant?

Answer 4

Paul v. Virginia resulted from a New York insurance broker who was arrested for illegally selling insurance in Virginia. He sued the state of Virginia on the grounds they were violating the constitution claiming insurance was protected by interstate commerce laws. Ultimately, the court ruled in favor of Virginia stating that insurance is a local contract and not interstate commerce.

This would set the precedent for the next several decades that the insurance industry was to be regulated by the state.

Question 5

What was the Sherman Antitrust Act (1870)?

Answer 5

The Sherman Antitrust Act (1870) prohibited activities which restrict interstate commerce and competition in the marketplace.

Question 6

What was the Clayton Antitrust Act (1914)?

Answer 6

The Clayton Antitrust Act (1914) aimed to promote fair competition by prohibiting unfair business practices which negatively impacted consumers.

Question 7

What was the Robinson-Patman Act (1936)?

Answer 7

The Robinson-Patman Act (1936) was an amendment to the Clayton Act which required the differences in prices be justified by reductions in operating costs.

Question 8

What the SEUA decision (1944) and why was it significant?

Answer 8

The SEUA decision followed the Sherman Antitrust Act (1890) and Clayton Antitrust Act (1914). The Southeastern Underwriters Association (SEUA) was indicted on federal charges of violating the Clayton Act for price fixing and attempting to gain a monopoly. Ultimately, the court found that the SEUA was guilty and ruled that insurance was commerce and was subject to federal regulation (including the Clayton and Sherman acts).

This would overrule the precedent that insurance was not subject to federal regulation.

Question 9

What was the McCarran-Ferguson Act (1945) and it’s significance?

Answer 9

The McCarran-Ferguson Act clarified the insurance industry would continue to be regulated by states on the basis that “it was in the public’s best interest”. There were three main exceptions to state regulation:
1. The Sherman Act continues to apply to the acts of boycott, coercion, and intimidation

2. The federal government would oversee regulation when states are not regulating activities
3. If the federal government passes legislation which specifically applies to the insurance industry, it will supersede state regulation

Question 10

What was the Gramm-Leach-Bliley Act / Financial Modernization Act (1999) and why was it significant?

Answer 10

The Gramm-Leach-Bliley Act (GLB) established a regulatory framework for the affiliation of banks, securities firms, and insurance companies.

It stated that each regulatory body would continue to regulate each respective segment which reaffirmed that regulation of insurance would remain in the state.

Question 11

What was the Dodd-Frank Act / Wall Street Reform and Consumer Protection Act (2010) and why was it significant?

Answer 11

The Dodd-Frank Act largely resulted in increased transparency and regulation of financial companies, but it did have some impact on the insurance industry. Mainly, it create the Federal Insurance Office (FIO) and enacted the Nonadmitted & Reinsurance Reform Act (NRRA).

Question 12

What is the Federal Insurance Office?

Answer 12

The Federal Insurance Office (FIO) was established by the Dodd-Frank Act (1999). The FIO is responsible for monitoring all aspects of the insurance industry. Their responsibilities and powers follow:

Responsibilities:
1. Advise the Secretary of Treasury on insurance matters of national importance

2. Represent the U.S. in international insurance meetings
3. Assist the Secretary of Treasury in negotiating covered agreements

Powers:
1. Collection of insurance industry data

Question 13

What is the Nonadmitted & Reinsurance Reform Act (2009)?

Answer 13

The Nonadmitted & Reinsurance Reform Act (NRRA) established the following:

1. Insured’s home state has exclusive authority of taxation
2. Defined Exempt Commercial Insurer
3. Reinsurer’s domiciliary state has authority to regulate financial solvency