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Exam 6 > Part 31 (Porter) (****) > Flashcards

Part 31 (Porter) (****) Flashcards

Insurance Regulation

1
Q

Development of Insurance Regulation Timeline

A

1752 First Insurer charted - Philadelphia
Early 1800s Sporadic state insurance regulation
1869 Paul v Virginia
1871 National Insurance Convention
1890 Sherman Antitrust Act
1914 Clayton Antitrust Act
1936 Robinson-Patman Act
1944 South-Eastern Underwriters Assocation decision
1945 McCarran-Ferguson Act
1972 NAIC: Unfair Claims Settlement Practices and Unfair Trade Practices Act
1999: Gramm-Leach-Bliley Act

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2
Q

What event is important in dealing with state insurance and regulation

A

Paul v Virginia

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3
Q

What happened in Paul v Virginia

A

Paul applied to be a licensed insurance agent in VA for NY insurers, but was denied. He sold the policies anyways and got arrested

Paul appealed to U.S. Supreme Court

Court Decided and agreed with VA lower court

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4
Q

What is the main concept in Paul v Virginia

A

Insurance is a contract delivered locally, thus insurance contract is not interstate commerce.

States should continue to regulate own insurance markets without violating Constitiution

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5
Q

What happened in response a little later in relation to Paul v Virginia

A

National Insurance Convention

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6
Q

Why did the National Insurance Convention get formed

A

More insurers in mid 1800s were operating in several states and were not happy with the outcome of Paul v Virginia because they were having problems meeting various state demands.

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7
Q

What did the NIC formation create

A
  • A constitution setting forth the regulators’ goals
  • Designed a uniform accounting statement
  • Adopted Guideline for insurer taxation
  • Adopted first model law which covered things like commissioner’s duties, and regulation of specific insurance
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8
Q

What also was a problem that happened around the same time as NIC formation

A

Insurers began writing multiline insurance, such as auto with property, but the DOI didn’t allow multiline insurers.

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9
Q

How were insureds supposed to get their auto and property insurance before the 1900s

A

Purchase two policies from separate insurers

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10
Q

What state first allowed multiline policies, sorta, what was the catch

A

New York, Two insurers were still needed and would share premiums and losses. But this happened in the back end.

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11
Q

When did regulators start to see the need for multiline policies and when did they allow it

A

1930’s
1945

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12
Q

How did insurance companies sell multiple lines if multi policies were not allowed

A

They created subsidiaries

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13
Q

WHat happened Pre-SeUA decision in mid 1800s that caused insurance companies to see insolvencies

A

There was fierce competition, and some companies would lower rates below adequate levels and go into insolvent

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14
Q

What did insurers do to stop this widespread insolvency from happening

A

Insurers formed compacts and associations to control rates

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15
Q

DId the compacts formed work

A

Not totally since insurers who did not agree to the compact still underpriced rates and the cycle continued

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16
Q

What were the two views of insurance compacts

A
  1. It deterred open and free competition (kind of like a monopoly)
  2. It provided the public with best interest, since it prevented insolvencies and insureds would never have to worry about not getting paid because of this.
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17
Q

Why did antitrust sentiments begin to flourish in the 1800s

A

There was lack of corporate regulation and some industry and financial executives acted unethically

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18
Q

What act was passed that addressed the antitrust sentiments but did not fully apply

A

Sherman Antitrust Act in 1980

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19
Q

Why did the Sherman Antitrust Act not directly apply to insurers

A

Insurance was not interstate commerce as seen in Paul v Virginia

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20
Q

Even though the Sherman Antitrust Act did not directly apply to insurers, what did it motiviate

A

States to pass their own antitrust laws against controlling rates, which prohibited insurer compacts from controlling rates

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21
Q

What formed after states began to repeal their antitrust laws

A

The SEUA (South Eastern Underwriters association) formed

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22
Q

What did Federal Investigation find when SEUA formed as states began to repeal antitrust laws

A
  • Continuing agreement and concert of action to take control of 90% of the fire and allied lines market
  • Fixing premium rates and agent’s commission
  • Using boycott and other forms of coercion and intimidation to force non-SEUA members to comply
  • Withdrawing rights of agents to represent SEUA members if they also represented non-SEUA companies
  • Threatening insurance consumers with boycott and loss of patronage if they didn’t purchase insurance from SEUA members
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23
Q

When SEUA case was initially brought up, what did the U.S. Supreme court decide in relation to

A

It was initially dismissed due to Paul v Virginia where the Sherman Antitrust act did not technically apply to insurance companies

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24
Q

When did the U.S Supreme court agree to hear the SEUA case

A

In 1994

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25
Q

What were the two key questions the court decided when considering the SEUA case

A
  1. Did congress intend the Sherman Act to prohibit insurer’s conduct of restraining/ monopolizing business?
  2. Do insurance transactions across state lines constitute “commerce among several states”, which will subject them to congressional regulation?
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26
Q

What were the answers to the two key questions in the SEUA case

A

Yes, congress did intend the Sherman Act to prohibit insurer’s conduct of business

Yes, insurance transactions across state lines does constitute commerce among several states which subjects them to Congressional regulation

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27
Q

What were some reasons the court decided that insurance transactions across state lines does constitute commerce…

A
  • Other Intangible products were subject to congressional regulation
  • Not a single business conduction business across state lines is beyond the regulatory powers of congress. Insurers should not be an exception
  • Most of the SEUA members were not domiciled in a state
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28
Q

What happened in the conclusion of the SEUA decision

A

Federal Legislation now applied to insurance
- Sherman Act, which prohibited collusion in attempts to gain monopoly power
- Clayton Act, which made practices that lessened competition or created monopoly power illegal

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29
Q

What are some examples of the Clayton acts that were made illegal

A
  • Price discrimination, where the amended version called Robinson-Patman Act required price differences to be justified by reducing operating costs
  • Tying, which made illegal the requirement of purchase of 1 product to purchase another
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30
Q

What did State regulators and insurance industry believe needed to be changed about the SEUA decision

A

Some forms of cooperation among insurance companies was necessary.

It needed establishing of statistical base for adequate rates

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31
Q

What needed to be amended in SEUA decision Acts

A
  • Congress must be pressured to enact legislation under commerce clause which allows states to continue to regulate insurance
  • Sherman Act and Clayton act must ammend to allow cooperative arrangements to establish adequate rates and coverages
  • FTC Act and Robinson-Patman Act must be amended to exclude insurance
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32
Q

The McCarran-Ferguson ACt of 1945 did what two things

What were the exceptions

A

a. Gave the NAIC and insurance industry what they wanted from SEUA

b. Returned Regulation of insurance back to states (justified by it was in the public best interest)

Exceptions:
- Sherman Act Continues to apply to the use of boycott, coercion, or intimidation
- Congress law that applies only to the insurance industry, it will supersede any state regulation

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33
Q

What were the requirements of the bills which would help ensure rates were not excessive, or unfairly discriminatory, and were adequate

As well as allowed cooperation in setting rates, as long as it didn’t hinder competition

A
  • Required prior approval of rates
  • Explained how to file rates
  • Described the role of rating organizations
  • Recommended anti-rebating laws which stopped insurers from returning portions of premiums to purchasers of insurance.
34
Q

Did States follow with the NAIC models that bills were needed to help ensure

A

No, states did not want prior approval laws and some still allowed rebating

35
Q

When did the Act Relating to Unfair Methods of Competition get adopted by the NAIC

A

in 1947

36
Q

What was the purpose of the Act Relating to Unfair Methods of Competition

A

To preempt application of the FTC Act to Insurance industry

37
Q

What activities were deemed to be unfair and deceptive by the Act Relating to Unfair Methods of Competition Act

A
  • Misrepresentation and False advertising of policies
  • False information and false advertising in general
  • Defamation
  • Boycott, coercion, and intimidation
  • False financial statements
  • Unfair discrimination
  • Rebating
38
Q

After 1946 what are the regulations particularly concerned with

A
  • Insurer Insolvencies
  • Unavailable and unaffordable insurance coverage
  • Inequitable treatment of insurance consumers
39
Q

What acts were passed post 1946 that delt with insurer insolvencies

A
  • Guaranty Association Model Act in 1969
  • 1971 NAIC implemented Early Warning Tests program (renamed to IRIS)
  • 1989 NAIC adopted accreditation program
40
Q

What was the goal of Guaranty Assocation Model Act in 1969

A

All states currently have guaranty funds

41
Q

Purpose of 1971 NAIC Early Warning Test Program

A

To prevent need for guaranty fund assessments by taking over insurers and returning them to active operations or merging them with other going concerns

42
Q

Purpose of 1989 NAIC Accreditation Program

A

Create similar financial solvency regulation standards in all states

43
Q

What were things done for Unavailable and Unaffordable Insurance Coverages

A
  • Majority of states formed FAIR plans
  • Laws governing captive insurance organizations
  • Buyers’ guides explaining standard policies and options
  • 1968 National Flood Insurance Act
  • 2002 TRIA
  • 1981 Risk Retention Act
44
Q

What are FAIR plans

A

Insurance pools through which private insurers collectively address an unmet need for property insurance

45
Q

What did the 1968 National Flood Insurance Act address

A

Affordability

46
Q

What did the 2002 TRIA provide

A

A Transparent system of shared public and private compensation for insured losses resulting from terrorist acts

47
Q

What did the 1981 Risk Retention Act address

A

Affordability of commercial insurance

48
Q

What is a misconception of surplus lines

A

That is unregulated, where actually regulation does not follow same pattern as traditional licensed market, but substantial regulation applies

49
Q

What are the common characteristics that Surplus lines laws have

A
  • Permit only specially licensed producers to place surplus lines business
  • Licensee must make placement with unauthorized/nonadmitted insurers that meet specified financial and managerial requirements
  • Before placement can occur, risk must be declined by admitted market
50
Q

Key characteristics of Surplus lines

A

Freedom from State imposed rate and form requirement

  • Rates and forms not regulated
  • Flexibility to adjust and quickly meet insured’s needs
51
Q

What is a great concern for regulators in surplus lines

A

A lack of guaranty fund protection

52
Q

What was the cause for the Gramm-Leach-Bliley Act

A

During 90s, affiliations between banks and insurers began to occur and questions arose who would regulate

The act addressed the issue of state vs. federal regulation

53
Q

Who traditionally regulated banking and who had regulated insurance

A

Federal government

States

54
Q

What was the outcome of GLB Financial Services Modernization Act

A

Each segment of financial services business is regulated separately, states continue to have primary authority over insurance

Prohibited state actions that would prevent bank related firms from selling insurance on same basis as insurance producers

Compels states to facilitate insurance producers’ ability to operate in more than one state

55
Q

How does GLB treat underwriting different from sales and marketing?

A
  • Prohibits national banks from forming subsidiaries to underwrite insurance
  • Allows for arrangement of financial holding companies to create insurance affiliates
56
Q

What concern does information sharing among banks and insurance affiliates have.

What are some examples

A

Privacy Concerns

  • Banks need to disclose information-sharing policies and practices
  • State laws can be more restrictive, which may lead to inconsistency in complying with state and federal laws.
57
Q

What concerns does GLB create

A
  • Privacy of personal financial information
  • Ability of state regulation to serve and integrated and global financial services market adequately
  • Consumer’s desire or need for integrated financial services
58
Q

When can a State laws and regulations be void under the U.S. Consititution

A
  • When a state law contradicts a federal law
  • When the courts determine that a state law interferes with the purpose of results of a federal even though the law doesn’t contradict federal law
  • When state law imposes an improper burden on interstate commerce, even though federal law does not exit
59
Q

States are given primary regulatory control over the “business of insurance” except when

A

Where the Federal government is involved

  • Sherman Act prohibiting boycott, coercion and intimidation
  • Federal antitrust laws apply to the extent that state laws do not regulate such activities
  • Federal laws enacted specifically to regulate the “business of insurance”
60
Q

Under McCarran-Ferguson federal regulation does not apply to business of insurance when

A
  • Business of insurance is regulated by the states
  • No boycott, coercion, or intimidation has occurred
61
Q

What court cases defined the “Business of Insurance”

A
  • U.S. v. SEUA (1944)
  • Robertson v . California (1946)
  • FTC v. National Casualty Co. (1958)
  • SEC vs. Variable Annuity Life Insurance Co. (1959)
  • SEC vs. National Securities Inc (1969)
  • Group Life and Health Insurance Co. vs Royal Drug Co. (1979)
  • Union Labor Life Insurance Co. Vs. Pireno (1982)
62
Q

What did U.S v SEUA conclude in Business of Insurance definition

A

Fixing rates by insurers is part of the business of insurance

63
Q

What did Robertson v California conclude in Business of Insurance definition

A

Licensing of insurance companies and agents part of the business of insurance

64
Q

What did FTC v. National Casualty Co. conclude in Business of Insurance definition

A

Selling and advertising of insurance policies is part of the business of insurance

65
Q

What did SEC vs Variable Annuity Life Insurance Co. conclude in Business of Insurance

A

Risk underwriting is the distinctive feature of the activities encompassed by the business of insurance

so variable annuities are not part of business of insurance

66
Q

What did SEC vs National Securities Inc conclude in Business of Insurance

A

Company stockholder relationships are not part of the business of insurance

The key features of business of insurance is
- Relationship between insurer and insured
- Types of policies that can be issued
- Reliability, interpretation, and enforcement of policies

Activities that affect insurance companies as they would other business are not part of the business of insurance

67
Q

What did Group Life and Health Insurance Co. vs Royal Drug Co. conclude in Business of Insurance

A

Business of Insurance is characterized by
- Spreading and Underwriting of risk
- Direct connection between insurer and insured
- Activity needs to be exclusive to entities within the insurance industry

68
Q

What did Union Labor Life Insurance Co. vs Pireno conclude in Business of Insurance

A

Three criteria from Royal Drug decision aren’t determinative on their own

Adds that each case must be independently considered

69
Q

Current definition of the “Business of Insurnace”

A

Any activity that has on or more of the following characteristics:
- Insurer spreads or underwrites the policyholder’s risk
- Insurer and the insured have a direct contractual agreement
- Activity is unique to entities within the insurance industry

Business of insurance receives protection from federal intervention as allowed under McCarran

70
Q

What were the three principal causes of Product liability insurance price and availability crisis found by House Energy and Commerce Committee

A

Questionable ratemaking and reserving practices of insurers

Unsafe products

Uncertainties

71
Q

What was made in response to the first principle cause found by House Energy and Commerce Committe

A

Product Liability Risk Retention Act of 1981 enacted to address ratemaking and reserving practices problems

72
Q

What did Product Liability Risk Retention Act of 1981 do

A

Enabled product manufacturer, wholesalers, distributes and retailers to form their own risk retention groups to spread and assume their products and completed operations exposures

73
Q

What did the National Flood Insurance Act do

A

Allowed Federal government to intervene when insurance not available in the private insurance market

P/C insurers are involved through Write-Your-Own flood insurance program, where private insurers issue policies at these rates and then keep 30% for admin expenses. Federal government acts as reinsurer in event of flood loss.

74
Q

What did the National Flood Insurance Act target in the 3 principle causes

A

The second: Unsafe products, as seen by government acting as reinsurance for flood policies

75
Q

What was done to target the 3rd principle cause

A

Obligation under the securities act of 1933
Obligation under the securities exchange act of 1944

76
Q

What did the Obligation under the securities act of 1933 made to do, and how did it do it

A
  • Implement market system so investors could gain ready access to material information on publicly-traded securities
  • Prevent abuses of fraud, deceit, and misrepresentation in sale

Done by
Making Stock organization register securities they plan to offer or sell to the public

77
Q

What was required in the obligations under the securities exchange act of 1934

A

Stock companies must provide annual reports to their shareholders including
- 5 years of financial data, including income and total assets
- Management’s discussion and analysis on items such as liquidity and planned uses of capital
- Industry segment information for the previous three years
- Income statement and statements of cash flow for three years and balance sheets for two years

78
Q

What was Employee Retirement Income Security Act of 1974 for

A

Enacted to Curb abuse in private pension system and in employee benefit plans

  • Employers were taking tax deductions for pension contributions but did not give employees the benefits promised
79
Q

How did ERISA affect insurance industry

A

Insurers that administer an ERISA covered employee benefit plan was responsible of verifying plan benefits and structure complying with ERISA

80
Q

What were the influence of the courts on Effects of State Insurance Department Functions

A

Effected the laws that DOI holds:

  • DOI must allow for procedural rights such as notice to another party like an intervenor and a right to a fair hearing
81
Q

What were the direct influences of the courts

A

Affected policy language with Contract of Adhesion and Doctrine of reasonable expectations

Any ambiguous language will be interpreted in favor of the insured

Insured’s reasonable expectation of coverage will be honored

Also affected claim settlement procedures and policy coverages

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