Insurance Regulation Flashcards
Paul v Virginia (1869)
Facts, issue, ruling
Facts
- Paul was not licensed by VA to sell insurance for NY companies
- Paul did so anyway and was arrested and fined
- Paul appealed this to supreme court
Did VA have the authority to prevent Paul from selling NY policies?
- Supreme court - YES - state could regulate insurance without violating US constitution
- Reasoning: insurance is a contract delivered locally (not interstate commerce) so federal legislation doesn’t apply
Sherman Antitrust Act (1890)
Facts
- Prohibits anti-competitve contracts that encourage monopolies
- Didn’t directly apply to insurers because not interstate commerce, but this did motivated states to enforce anti-trust laws
- Too vague and large companies found ways around it
Clayton Antitrust Act (1914) + Robinson-Patman Act (1934)
Facts
Prohibits activities that encourage monopoly (TEMPO)
- Tying - requiring purchase of 1 product to purchase another
- Exclusive dealings - sale of insurance conditional on buyers not doing business with competitors
- Price discrimination - pricing differences between similar risks
- Mergers & Acquisitions that lessen competition
- One person cannot be director of 2 competing corporations
Robinson Patman Act - Amendment to Clayton
- Price discrimination - price differences must be justified by reduced operating cost
Anti-Competitve Practices Tolerated in Insurance
Rate Bureaus
- 3rd party that provides common info to multiple companies for pricing purposes (rate filings)
- This is permitted for maintaining adequate rates / avoid discrimination
US vs Southeast UW Association (SEUA) (1944)
Facts, issue, rulings
Facts
- DOJ accused SEUA on violations of Sherman Antitrust Act
- Fixing rates and agents’ commissions
- Boycotting non SEUA members to comply with the rate fixing
- monopolization of market
Does the federal government have authority to override states and regulate the business of insurance?
- District court - NO, case dismissed
- Supreme court - YES, district court decision reversed
McCarran-Ferguson Act (1945)
Facts, exceptions
Facts
- Preserves the authority of states to regulate insurance
- Exempts insurance from most federal regulations including antitrust regulation
Exceptions (Federal government may regulate insurance if)
- If state is not regulating insurance
- Federal law applying specifically to insurance supersedes state law
- Sherman Antitrust NOT exempt - so NO boycotting, coersion (threatening), intimidation
Gramm-Leach Bliley Act (GLB) (1999)
Background, provisions
- Removed barriers between banking, securities and insurance companies
- prior to GLB, any one instiution was prohibited from acting as a combination of ^
Provisions
- Prohibits paying claims with bank funds (if holding company holds bank and insurer)
- Cannot prevent banks from selling insurance
- Facilitate selling insurance in more than 1 state
- Requires disclosure of info-sharing practices between banks and insurer affiliates
- Prohibits formation of insurance selling subsidiaries by national banks
Business of Insurance Characteristics
- specific to insurance industry
- spreads or transfer risk
- contract between insurer and insured
State Guaranty Fund
- a fund administered by each state to protect policyholders in an insolvency
- the fund pays most outstanding claims and refunds most unearned premiums
Funded
- it is funded by all insurers licensed in the state
- solvent insurers pay roughly 1-2% of NWPs in assessments to the fund
- fund members elect a board of directors (approved by state insurance commissioner)
- protects only policyholders of licensed insurers (NOT surplus lines)
Surplus Lines / Non-Admitted Insurers
Facts, regulations
Surplus line insurer accept risks that are declined by admitted insurers because they don’t have to follow all state regulations
- more flexibility in rates and coverage (limits)
- exempt from rate filings –> insurer can always charge adequate premium
- exempt from guaranty funds –> cost of fund not passed on to policyholder
Surplus line regulations
- product must be unavailable in traditional insurance market
- producers must be licensed to sell surplus line insurance
- business placed with insurers that meet managerial and financial requirements
Tests for Regulation’s Success
PIE
Protecting policyholders
- quality of customer services (# of complaints and disputes)
- reduction in probability of insolvency
- compensation in event of an insurer insolvency
Protecting investors
- ensure regular and accurate financial reporting
Protecting the economy in general
- ensure healthy and competitive market
- promote availbility and affordability
Concepts Related to Regulatory Failures
Concepts and consequences
Regulatory Fallibility
- human errors by regulators (miscalc IRIS ratio, missing deadlines, etc)
Regulatory Forbearance
- failure to intervene promptly for a troubled company
- why? company may recover without intervention or company object to intervention
- Consequences
- if company recovers –> none
- if not –> greater impact to policyholders and greater strain on guaranty fund
Regulatory Capture
- tendency for regulator to side with an interest group (might have caused 2008 crisis)
- why? interest group may be good at influencing a regulator or there’s political interference
- Consequences
- if company recovers –> none
- if not –> greater impact to policyholders and greater strain on guaranty fund
Checks & Balances in the US Insurance Regulatory System
D2P2M
Duplication:
- Multi-state insurers are subject to regulation in each state of operation
- Unlikely all states miss troubled company’s warning signs
Diversity of Perspective:
- Different regulators have different perspectives on regulations
- Competing perspectives prevent overregulation or deregulation
Peer Review
- NAIC coordinates peer review groups Financial Analysis Division (FAD) and Financial Analysis Working Group (FAWG)
- FAD analyses nationally significant insuers and refers unusual findings to FAWG
Peer Pressure
- Any state can investigate or take action against an insurer operating in their state
- This can pressure other states to do the same
Market Discipline
- State-based regulation cannot easily access federal bailout funds
- This eliminates moral hazard of relying on federal government and provide incentive for strong state regulation
ELements in Building an Effective Global Insurance Regulatory System
TSAR
- trust: regulators must trust each other
- share: regulators in different countries must share information
- action: other countries must be able to take action against an insurer if they are dissatisfied with another regulator
- resolutions for bankruptcies (similar to guaranty funds in the US)
NAIC Principles for National Regulatory Structure
STarCH
- standards:
- uniform where appropriate but local where necessary
- set and enforce at state level
- states should be able to collect taxes and fees
- encourage collaboration with international bodies
- state regulators should have equal standing with other regarding holding companies
