Insurance Regulation Flashcards
State a basic timeline of legal cases/events that shaped insurance
1869: Paul v Virginia
1890: Sherman Antitrust Act
* 1914: Clayton Antitrust Act
* 1936: Robinson-Patman amendment to Clayton Antitrust Act
1944: U.S. v SEUA (South-East Underwriters Association)
1945: McCarran-Ferguson Act
1999: Gramm-Leach-Bliley Act
Porter Development
Who has the authority to regulate insurers?
The McCarran-Ferguson Act essentially gives states the authority to regulate insurers. Insurers are subject to federal anti-trust acts to the extent they aren’t regulated by state law. But the federal government still retains the right to pass insurance laws that supersede state laws.
Porter Development
List examples of issues that fall under insurance regulation
- financial regulation (capital requirements, investments,…)
- market conduct (sales, U/W, claims handling)
- licensing (both insurers & producers)
Porter Development
Describe Paul V Virginia
1869
Facts:
Prior to 1869, insurance was regulated exclusively by states.
Paul was not licensed by VA to sell insurance for companies domiciled in NY, but did so anyway.
Paul was arrested and fined.
Issues:
Did VA have the authority to prevent Paul from selling NY policies in VA?
Rulings:
Supreme Court: Yes, states could regulate insurance without violating U.S. Constitution.
Reason: Insurance is a contract delivered locally, not interstate commerce, so federal legislation doesn’t apply.
Porter Development
Describe Sherman Antitrust Act and Identify the relevant offshoots for Insurance
1890
The Sherman Act was the original antitrust legislation from 1890, but it was too vague and big companies found ways to circumvent it and continue to engage in anti-competitive practices.
The Sherman Antitrust Act prohibits anti-competitive contracts that encourage monopolies - restraint of trade/commerce
(applies only to interstate commerce ==> does not apply to insurance because of ‘Paul v Virginia’)
The Clayton Act (1914) and Robinson-Patman Act (1936) were updates that attempted to eliminate loopholes in the Sherman Act. The Clayton Act was more specific than the Sherman Act and prohibited activities such as those listed below. These acts apply to all business, although their applicability to insurance was not adjudicated until the SEUA case.
Porter Development
Describe The Clayton Act
1914
The Clayton Antitrust Act prohibits activities that encourage monopoly power specifically:
Tying requiring purchase of 1 product to purchase another → can’t require purchase of auto insurance to buy homeowners insurance
Exclusive dealings - sale of insurance conditional on buyer not doing other business with competitors
Mergers & acquisitions that lessen competition
Price discrimination - pricing differences between similar risks
One person cannot be a director of Two competing corporations
Some anti-competitive practices are tolerated in insurance. Examples are rate bureaus and insurer compacts. A rate bureau is a 3rd party that provides common information to multiple companies for the purposes of pricing. This is permitted to maintain adequate rates and avoid unfair discrimination. (An insurer compact is an association of insurers, also for the purpose of maintaining adequate rates.)
Porter Development
Describe The Robinson-Patman Act
1936
An ammedment to the Clayton Antitrust Act:
price discrimination - must be based on reduced operating costs of corporation
Porter Development
Describe the U.S. v South-Eastern Underwriters Association (SEUA)
1944
Facts: (U.S. v SEUA)
In 1942 DOJ (Department of Justice) indicted SEUA on 2 violations of the Sherman Antitrust Act:
- rate-fixing and subsequent boycotting of agencies who didn’t go along with rate-fixing
- monopolization of market
Issues:
Does the federal government have the authority to preempt states and regulate the business of insurance?
Rulings:
District Court: No, federal authority is not recognized. DOJ case is dismissed.
Supreme Court: Yes, federal authority of insurance is recognized. District Court decision is reversed. (4-3 decision)
- Sherman AntiTrust Act applies and already covers monopolization
- insurance is interstate commerce (other intangible products like electricity transfer are subject to federal regulation of interstate commerce so insurance should be also)
- only a small number of SEUA members were domiciled in 1 of the SEUA states (comprised 6 southern states)
Note that the decision in U.S. v SEUA gave regulatory authority of insurance to the federal government and made insurer compacts that engage in anti-competitive practices illegal. In response, the NAIC pressured Congress to return authority to states (under Commerce Clause of Constitution) and that would permit cooperative rate-setting as was done in the compacts (amendments to Sherman Act, Clayton Act.) After McCarran-Ferguson (described below) the NAIC proposed 2 model bills to ensure rates were adequate, not excessive, and not unfairly discriminatory, and also to allow cooperative rate-setting provided it didn’t hinder competition. The motivation of the NAIC model law can be described as identifying unfair trade practices and reducing federal intervention.
Porter Development
Describe McCarran-Ferguson Act
1945
In 1945, Congress passed the McCarran-Ferguson Act in response to the Supreme Court ruling in the SEUA case. This Act:
* essentially preserves the authority of states to regulate insurance
* but federal laws applying exclusively to insurance supersede state laws
* exempts insurance from most federal regulation including antitrust regulation, (not exempt from Sherman Antitrust Act)
* but doesn’t exempt boycott, coercion, intimidation regardless of state regulation
Porter Development
Describe the Gramm-Leach-Bliley Act
1999
The Gramm-Leach-Bliley Act is a federal law that removed barriers between banking, securities, and insurance companies. Prior to GLB, any one institution was prohibited from acting as any combination of investment bank, commercial bank, and insurance company. (GLB repeals portions of the Glass-Steagall Act, enacted during the Great Depression of the 1930s in an effort to prevent future financial crises.)
GLB also requires financial institutions to explain how they share and protect their customers’ private information. In particular, it requires disclosure of information-sharing practices between banks and insurer affiliates. This is important in modern times where personal information has great economic value to corporations.
Here’s a short list of GLB provisions:
* REQUIRES disclosure of information-sharing practices between banks and insurer affiliates
* PROHIBITS formation of insurance-selling subsidiaries by national banks
* PROHIBITS paying claims with bank funds (if holding company holds bank & insurer)
* PROHIBITS preventing banks from selling insurance (states can’t make laws to prevent banks from selling insurance)
* FACILITATES selling insurance in more than 1 state by a single producer
This last GLB provision prompted a response by the NAIC called the Producer Model Act. This Act helps states establish reciprocal licensing & uniform standards across states.
Porter Development
What is a surplus lines insurer?
Surplus lines insurers (also called non-admitted insurers) will accept risks that are declined by admitted insurers. An admitted insurer is simply one that is licensed in the state and must abide by all state regulations. The reason a non-admitted insurer accepts risks that other insurers do not is that a non-admitted insurer doesn’t have to abide by all state regulations. This gives them leeway in rates, coverage, and the matter of guaranty funds. This isn’t to say that non-admitted insurers are unregulated, but the regulations are relaxed because they fill a need in the market, possibly very high limits or unique underwriting characteristics, or other risks that admitted insurers don’t want to take on.
Porter Development
Briefly describe a typical surplus lines transaction
a specially licensed surplus lines broker places insurance with an unauthorized/non-admitted insurer
Porter Development
Identify 2 types of regulatory exemptions for surplus lines and the benefits to policy holders
exemption ==> from filing rates
benefit: insurer can always charge adequate premium
exemption ==> from guaranty funds
benefit: costs of fund not passed on to policyholder
Porter Development
Describe ways that the surplus lines market is regulated
- product must be unavailable in traditional insurance market
- producers must be licensed to sell surplus lines insurance
- producers must place business with insurers that meet managerial & financial requirements
Porter Development
Identify exceptions to the McCarran-Ferguson Act
FEDERAL govt may regulate insurance if
- states are NOT regulating insurance
- Sherman Act applies (boycott, intimidation by insurer)
- if Congress passes an applicable law (supersedes state law)
Porter Roles Fed
The main test of regulation’s success is effectiveness in achieving its objectives in what areas?
- protecting Policyholders
- protecting Investors
- protecting Economy, in general
- protecting Depositors
Vaughan Crisis
Describe each of the main goals regulation more in depth
protecting policyholders
- quality of customer service (# of complaints and disputes)
- reduction in probability of insolvency (identification & rectification of potential problems)
- compensation in the event of an insurer insolvency
protecting depositors
- I asked Alice the Actuary what this means but she didn’t know. She thinks it’s an error because the term “depositors” usually refers to banking rather than insurance.
protecting investors
- ensure regular and accurate financial reporting
protecting the economy generally
- ensure a healthy & competitive market
- promotes availability & affordability
- benefits of regulation should be greater than the costs
Vaughan Crisis
Identify 3 concepts related to regulatory failure
Regulatory Fallibility
Regulatory Forbearance
Regulatory Capture
Vaughan Crisis
Describe the concept of regulatory Fallibility
Regulators are human and humans make errors
(includes things like miscalculating IRIS ratios, missing deadlines, losing paperwork, smoking weed in the break room…)
Vaughan Crisis
Briefly describe the concept of regulatory Forbearance
definition: failure of a regulator to intervene promptly in a troubled company
reasons:
company may recover without intervention (not all troubled companies go bankrupt)
company may object to intervention (Ex: because regulator may want a prompt increase in capital or decrease in debt)
consequences:
if company recovers → no consequences
if company doesn’t recover → impact to policyholders and strain on guaranty funds may be worse than if regulator had intervened earlier
- data shows that troubled companies often take increased risks when trying to recover
- these increased risks could be successful or they could make a bad situation worse.
Vaughan Crisis
Briefly describe the concept of regulatory Capture
definition: tendency for a regulator to assume the mindset of an interest group
reasons:
the interest group may be good at influencing a regulator
political interference
consequences: (same as for “forbearance” above)
if company recovers → no consequences
if company doesn’t recover → impact to policyholders and strain on guaranty funds may be worse than if regulator had intervened earlier
Vaughan Crisis
Identify checks & balances in the U.S. insurance regulatory system for limiting regulatory failures
Duplication
Diversity of Perspective
Peer Review
Peer Pressure
Market Discipline
Vaughan Crisis
Describe check/balance of Duplication
- multi-state insurers are subject to regulation in each state of operation
- 1 state may missing warning signs of a troubled company
- but it’s unlikely that all states would miss the warning signs
Vaughan Crisis
Describe the check/balance of Diversity of Perspective
- different regulators have different perspectives regarding regulation
- some prefer strong regulation (higher costs but protects consumers)
- some prefer weak regulation (lower costs but can be harmful to consumers)
- competing perspectives encourage centrist solutions (prevents overregulation / deregulation)
Vaughan Crisis
Describe the check/balance of Peer Review
NAIC coordinates peer review groups FAD & FAWG
FAD = Financial Analysis Division
→ analyzes nationally significant insurers
→ refers unusual findings to FAWG
FAWG = Financial Analysis Working Group
→ consists of 16 highly experienced financial regulators
(not the same as regulatory duplication by state regulators)
Vaughan Crisis
Describe the check/balance of Peer Pressure
- any state can investigate or take action against any insurer operating in their state
- such action by 1 state can pressure other states to do the same
Vaughan Crisis
Describe the check/balance of Market Discipline
- state-based regulation cannot easily access federal bailout funds (eliminates moral hazard of relying on federal government)
- provides incentive for states to exercise strong regulation
Vaughan Crisis
