Part 31 (Porter) (****) Flashcards
Insurance Regulation
Development of Insurance Regulation Timeline
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
What event is important in dealing with state insurance and regulation
Paul v Virginia
What happened in Paul v Virginia
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
What is the main concept in Paul v Virginia
Insurance is a contract delivered locally, thus insurance contract is not interstate commerce.
States should continue to regulate own insurance markets without violating Constitiution
What happened in response a little later in relation to Paul v Virginia
National Insurance Convention
Why did the National Insurance Convention get formed
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.
What did the NIC formation create
- 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
What also was a problem that happened around the same time as NIC formation
Insurers began writing multiline insurance, such as auto with property, but the DOI didn’t allow multiline insurers.
How were insureds supposed to get their auto and property insurance before the 1900s
Purchase two policies from separate insurers
What state first allowed multiline policies, sorta, what was the catch
New York, Two insurers were still needed and would share premiums and losses. But this happened in the back end.
When did regulators start to see the need for multiline policies and when did they allow it
1930’s
1945
How did insurance companies sell multiple lines if multi policies were not allowed
They created subsidiaries
WHat happened Pre-SeUA decision in mid 1800s that caused insurance companies to see insolvencies
There was fierce competition, and some companies would lower rates below adequate levels and go into insolvent
What did insurers do to stop this widespread insolvency from happening
Insurers formed compacts and associations to control rates
DId the compacts formed work
Not totally since insurers who did not agree to the compact still underpriced rates and the cycle continued
What were the two views of insurance compacts
- It deterred open and free competition (kind of like a monopoly)
- 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.
Why did antitrust sentiments begin to flourish in the 1800s
There was lack of corporate regulation and some industry and financial executives acted unethically
What act was passed that addressed the antitrust sentiments but did not fully apply
Sherman Antitrust Act in 1980
Why did the Sherman Antitrust Act not directly apply to insurers
Insurance was not interstate commerce as seen in Paul v Virginia
Even though the Sherman Antitrust Act did not directly apply to insurers, what did it motiviate
States to pass their own antitrust laws against controlling rates, which prohibited insurer compacts from controlling rates
What formed after states began to repeal their antitrust laws
The SEUA (South Eastern Underwriters association) formed
What did Federal Investigation find when SEUA formed as states began to repeal antitrust laws
- 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
When SEUA case was initially brought up, what did the U.S. Supreme court decide in relation to
It was initially dismissed due to Paul v Virginia where the Sherman Antitrust act did not technically apply to insurance companies
When did the U.S Supreme court agree to hear the SEUA case
In 1994
What were the two key questions the court decided when considering the SEUA case
- Did congress intend the Sherman Act to prohibit insurer’s conduct of restraining/ monopolizing business?
- Do insurance transactions across state lines constitute “commerce among several states”, which will subject them to congressional regulation?
What were the answers to the two key questions in the SEUA case
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
What were some reasons the court decided that insurance transactions across state lines does constitute commerce…
- 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
What happened in the conclusion of the SEUA decision
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
What are some examples of the Clayton acts that were made illegal
- 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
What did State regulators and insurance industry believe needed to be changed about the SEUA decision
Some forms of cooperation among insurance companies was necessary.
It needed establishing of statistical base for adequate rates
What needed to be amended in SEUA decision Acts
- 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
The McCarran-Ferguson ACt of 1945 did what two things
What were the exceptions
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
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
- 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.
Did States follow with the NAIC models that bills were needed to help ensure
No, states did not want prior approval laws and some still allowed rebating
When did the Act Relating to Unfair Methods of Competition get adopted by the NAIC
in 1947
What was the purpose of the Act Relating to Unfair Methods of Competition
To preempt application of the FTC Act to Insurance industry
What activities were deemed to be unfair and deceptive by the Act Relating to Unfair Methods of Competition Act
- Misrepresentation and False advertising of policies
- False information and false advertising in general
- Defamation
- Boycott, coercion, and intimidation
- False financial statements
- Unfair discrimination
- Rebating
After 1946 what are the regulations particularly concerned with
- Insurer Insolvencies
- Unavailable and unaffordable insurance coverage
- Inequitable treatment of insurance consumers
What acts were passed post 1946 that delt with insurer insolvencies
- Guaranty Association Model Act in 1969
- 1971 NAIC implemented Early Warning Tests program (renamed to IRIS)
- 1989 NAIC adopted accreditation program
What was the goal of Guaranty Assocation Model Act in 1969
All states currently have guaranty funds
Purpose of 1971 NAIC Early Warning Test Program
To prevent need for guaranty fund assessments by taking over insurers and returning them to active operations or merging them with other going concerns
Purpose of 1989 NAIC Accreditation Program
Create similar financial solvency regulation standards in all states
What were things done for Unavailable and Unaffordable Insurance Coverages
- 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
What are FAIR plans
Insurance pools through which private insurers collectively address an unmet need for property insurance
What did the 1968 National Flood Insurance Act address
Affordability
What did the 2002 TRIA provide
A Transparent system of shared public and private compensation for insured losses resulting from terrorist acts
What did the 1981 Risk Retention Act address
Affordability of commercial insurance
What is a misconception of surplus lines
That is unregulated, where actually regulation does not follow same pattern as traditional licensed market, but substantial regulation applies
What are the common characteristics that Surplus lines laws have
- 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
Key characteristics of Surplus lines
Freedom from State imposed rate and form requirement
- Rates and forms not regulated
- Flexibility to adjust and quickly meet insured’s needs
What is a great concern for regulators in surplus lines
A lack of guaranty fund protection
What was the cause for the Gramm-Leach-Bliley Act
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
Who traditionally regulated banking and who had regulated insurance
Federal government
States
What was the outcome of GLB Financial Services Modernization Act
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
How does GLB treat underwriting different from sales and marketing?
- Prohibits national banks from forming subsidiaries to underwrite insurance
- Allows for arrangement of financial holding companies to create insurance affiliates
What concern does information sharing among banks and insurance affiliates have.
What are some examples
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.
What concerns does GLB create
- 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
When can a State laws and regulations be void under the U.S. Consititution
- 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
States are given primary regulatory control over the “business of insurance” except when
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”
Under McCarran-Ferguson federal regulation does not apply to business of insurance when
- Business of insurance is regulated by the states
- No boycott, coercion, or intimidation has occurred
What court cases defined the “Business of Insurance”
- 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)
What did U.S v SEUA conclude in Business of Insurance definition
Fixing rates by insurers is part of the business of insurance
What did Robertson v California conclude in Business of Insurance definition
Licensing of insurance companies and agents part of the business of insurance
What did FTC v. National Casualty Co. conclude in Business of Insurance definition
Selling and advertising of insurance policies is part of the business of insurance
What did SEC vs Variable Annuity Life Insurance Co. conclude in Business of Insurance
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
What did SEC vs National Securities Inc conclude in Business of Insurance
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
What did Group Life and Health Insurance Co. vs Royal Drug Co. conclude in Business of Insurance
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
What did Union Labor Life Insurance Co. vs Pireno conclude in Business of Insurance
Three criteria from Royal Drug decision aren’t determinative on their own
Adds that each case must be independently considered
Current definition of the “Business of Insurnace”
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
What were the three principal causes of Product liability insurance price and availability crisis found by House Energy and Commerce Committee
Questionable ratemaking and reserving practices of insurers
Unsafe products
Uncertainties
What was made in response to the first principle cause found by House Energy and Commerce Committe
Product Liability Risk Retention Act of 1981 enacted to address ratemaking and reserving practices problems
What did Product Liability Risk Retention Act of 1981 do
Enabled product manufacturer, wholesalers, distributes and retailers to form their own risk retention groups to spread and assume their products and completed operations exposures
What did the National Flood Insurance Act do
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.
What did the National Flood Insurance Act target in the 3 principle causes
The second: Unsafe products, as seen by government acting as reinsurance for flood policies
What was done to target the 3rd principle cause
Obligation under the securities act of 1933
Obligation under the securities exchange act of 1944
What did the Obligation under the securities act of 1933 made to do, and how did it do it
- 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
What was required in the obligations under the securities exchange act of 1934
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
What was Employee Retirement Income Security Act of 1974 for
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
How did ERISA affect insurance industry
Insurers that administer an ERISA covered employee benefit plan was responsible of verifying plan benefits and structure complying with ERISA
What were the influence of the courts on Effects of State Insurance Department Functions
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
What were the direct influences of the courts
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
