NAIC & rate regulation

Question 1

NAIC regulatory objectives

Answer 1

• Protect the public interest
• Promote competitive markets
• Facilitate the fair and equitable treatment of insurance consumers (NAIC maintains databases for sharing of information about consumer complaints among the states)
• Promote the reliability, solvency, and financial solidity of insurance institutions (NAIC promulgates the annual statement blanks and the IRIS ratios to aid in solvency monitoring)
• Support and improve state regulation of insurance (NAIC has implemented the accreditation process to promote consistent, effective regulation across all states)

Question 2

NAIC’s job

Answer 2

Coordinate the regulation of insurers operating in multiple jurisdictions

Question 3

Uniform financial reporting from insurance companies was one of the first significant steps to create

Answer 3

effective regulation that helps maintain industry’s financial stability

Question 4

Examples of ways NAIC staff supports state insurance regulatory Officials

Answer 4

Supporting NAIC’s committees and task forces

• Maintain databases to help regulators track financial adequacy of insurers
• Scrutinizing alien or E&S insurers seeking to do business in U.S.
• Supporting individual state insurance regulators in court cases by issuing “friend of the court” supportive briefs
• Valuing insurers’ securities
• Keeping track of insurance issues at federal level
• Helping state insurance officials with info about pricing and coverage
• Assisting states in responding to federal reporting requirements
• Producing various publications about insurance issues
• Developing statistical reports dealing with financial and market matters
• Giving expert advice about financial regulation, market conduct regulation, and computer usage to state insurance officials

Question 5

Model Law

Answer 5

• NAIC model laws help guide states in adopting the same or similar insurance laws, regulations, and guidelines
• NAIC drafts model laws and state regulators review and modify or adopt as is
• Model laws help legislative bodies streamline their legislative development process

Question 6

By drafting model laws and recommending that each of the several states pass them

Answer 6

NAIC strives to enhance the quality and uniformity of insurance regulation across the several states, this has benefit to national carriers in that they can spend less on getting rates approved since there are more consistent filing packages that they must prepare

Question 7

Granting Financial Accreditation to DOIs & success/criticism

Answer 7

NAIC created basic standards to improve quality of insurance company solvency regulation by the individual states

• Requires state to implement a number of legislative and administrative measures to bring about an effective solvency regulation program
• Establishes a framework for state solvency regulation in the following areas: 1. Laws and regulations 2. Regulatory practices and procedures 3. Organizational and personnel practices
• State accreditation has sought to improve uniformity & overall quality
• program successful by leading states in adopting similar and uniform solvency laws and improving the consistency in solvency regulation. All 50 states and DC have been accredited
• Criticism: NAIC has been accused of usurping legislative power

Question 8

Accreditation program sets minimum standards for DOI solvency regulation such that

Answer 8

other states can rely on that DOI’s regulatory practice related to multistate risks

Question 9

NAIC accreditation program serves to provide more uniform regulation among the states to help

Answer 9

facilitate and improve state regulation

• It does this by requiring states’ laws and regulations meet the basic standards of NAIC model laws
• It looks to make sure the state practices and procedures are acceptable and that the state has the authority to impose sanctions and take regulatory action
• It also makes sure that the organizational structure and personnel of the DOI are adequate

Question 10

Insurance companies are subject to state regulation

Answer 10

• rate regulation
• Insurance companies are subject to market conduct regulation. This would include claims handling practices
• Insurance companies are also subject to solvency regulation – they cannot allow their capital to go below a certain amount or corrective action will be taken.

Question 11

Regulating solvency of insurance companies

Answer 11

• Financial Examinations – State regulators monitor insurer’s financial statements and examine its records to assess the strength of the company.
• NAIC RBC Ratio – The risk-based capital analysis establishes a minimum level of required capital and gives the state legal authority to take over an insurance company if necessary.
• IRIS Ratios – The tests help determine as early as possible those insurers that might be in financial trouble and prioritizes the examination schedule accordingly
• Financial Analysis Working Group (FAWG) monitors solvency of nationally significant insurers to ensure nothing is missed in other monitoring techniques
• Require periodic financial reporting using standardized reports (SAP) to regulators

Question 12

Four Basic Types of Filing Laws

Answer 12

• Prior approval: Insurance rates and coverages must be approved by the state insurance department before they can be used in the state
• File and use: Insurer must file insurance rates or coverages with the state insurance department but can then use them immediately
• Use and file: Insurer can use the rate or coverage it wants, provided the insurer files the rate or coverage within a specified period after it is put into use
• No file: Insurer not required to make a filing of the rate or coverage
• Even without prior approval filing laws, insurance regulators still have legal authority to disapprove a rate or coverage and to require withdrawal of rate or coverage

Question 13

Common reasons for disapproval of rates

Answer 13

Contrary to public interest -Illegal -Unfairly discriminatory -excessive, inadequate or not meeting minimum standards -rate change exceeds state cap –insufficient supporting documentation

Question 14

Prior approval disadvantage and advantage

Answer 14

Advantage – regulator has close surveillance of insurer and can protect insured.

Disadvantage – delays in rate approvals that do not allow insurers to charge rates based on market trends

Question 15

Arguments for no-file

Answer 15

allows free market competition to regulate insurance company rates, gives companies greater flexibility to react to changes in their loss cost or rating factors to gain competitive advantage. Can provide more innovative products quicker to market. Will reduce the costs of filings for insurers (and these costs get passed down to policyholders). Competition will naturally ensure rates are fair

Question 16

Licensing Regulation Domestic Insurer

Answer 16

• Location of books and records – usually seeks assurance the insurer will retain books and records in the state
• Principal office – many DOIs require insurer to maintain an office in the state
• Before issuing a license, regulators may schedule an organizational examination: Verify minimum capitalization is on deposit at an approved financial institution, Verify that management team in place, Corporate records are in good order, Policy forms and rates have department approval, Gives employees chance to review with the examiners the various DOI expectations for reporting

Question 17

Seasoning

Answer 17

Only experienced insurers are acceptable candidates for foreign insurers

• Exceptions if insurer has substantial capital, owned by an insurer with lengthy history, or if the department is satisfied with the application for other reasons
• Prevent start-ups from engaging in multistate licensing projects in initial years of operation
• DOI does not want a newly formed insurer with little to no experience to enter its insurance market and possibly cause disruptions. May make them wait until they have had a few years of experience in another state first

Question 18

purpose of rate regulation

Answer 18

= is financial stability of the insurer; results in consumer protection & led early regulators to focus on reserves and investments

Question 19

Cost of insurance important to consumers

Answer 19

Want rates affordable and fair, Want the insurer to remain solvent

Question 20

common themes for degrees of regulation for LOBs

Answer 20

Does/doesn’t impact a large portion of the population, Highly individualized risks, not a mandatory coverage, Requires expertise not yet found in most departments, Sophisticated rating and classification system, Insolvencies affect guaranty fund, Consumers are not sophisticated

Question 21

Ocean Marine & Inland Marine rate regulation

Answer 21

• Ocean Marine=very little regulation, Highly individualized risks, No statistical info to justify rates, Knowledgeable buyers and sellers
• Inland Marine=generally only informational filings needed, Highly individualized risks, No statistical info to justify rates, Diverse coverages and classifications

Question 22

surety & title rate regulation

Answer 22

• Surety=rate manuals filed, little regulatory review, Less detailed stat plan and ratemaking data, Fewer statistically based rating, Subjective risk evaluation, Less credible loss experience
• Title=rate manuals filed, little regulatory review, No stat plan or ratemaking data, Few rating or risk evaluation factors, Underwriting and exposure identification key to controlling losses, Driven more by business expense than by insured losses

Question 23

CGL, PPA, WC rate regulation

Answer 23

• Commercial General Liability= general regulation, except during tight markets, Sophisticated buyers
• Private Passenger Auto/HO=often regulatory review of overall rates and details of rating plan, Legally required or socially desirable for consumers to purchase, Uninformed consumers, Highly uniform stat plan with credible rate data/Not very refined classification system or rating plan, Complex rates and classification system, Legislators and regulators understand and are familiar with it, Lack of credible data to base rates on
• Workers Compensation=close regulation, prior approval of rates and classification system, Legally required of most employers, Costly, widespread business, Complex rating and classification system

Question 24

Political theory of regulation

Answer 24

• Partially explains the rate regulatory system
• Regulatory attention can be greatest for issues that attract substantial voter interest and are easy for policymakers to understand

Question 25

Historically the major criticism of insurance regulation

Answer 25

• has been the cost of dealing with multiple states
• Inefficient
• Single regulator would reduce cost, increase uniformity & provide a national voice

Question 26

Economic crisis indicated that efficiency is not the most important objective for regulation

Answer 26

• Minimal bailouts in insurance (vs financial industry), this may be due in part to the different business models/ culture, but differences in regulator structure likely was a factor
• Eg AIG’s credit default swap activities occurred outside the insurance entities. If within, they would have been subject to capital and reserving requirements
• Main test of insurance regulation is its effectiveness in protecting policyholders, depositors, investors and the economy