Porter Flashcards
What is the current definition of “Business of Insurance”?
One or more:
* Insurer spreads or underwrites policyholder’s risk
* Insurer and the insured have direct contractural agreement
* Activities unique to entities within the insurance industry
Purpose for surplus lines
Provide coverage for risks that are unique, require high limits or difficult UW characteristics
Surplus lines regulation
- Diligent search to show product is unavailable
- Solvency requirements
- Specially licensed producers
- Financial statements filed/domiciliary state regulation
3 sources of state insurance law
- Legislative - law
- Executive - enforce
- Judicial - settle disputes
4 components of state insurance regulatory system
- Licensing (Insurers & Producers)
- Reporting & Filing
- Periodic Exams
- Power to impose sanctions
Activities of National Conference of Insurance Legislators (NCOIL)
- Educating legislators on insurance issues
- Improve insurance regulation
- Congressional initiatives that may affect
- Help communications between state legislators
5 Objectives of the NAIC
- Protect the public interest
- Promote competitive markets
- Faciliate fair and equitable treatment of insurance consumers
- Promote reliability & solvency of insurers
- Support and improve state regulation of insurance
Ways NAIC helps state regulators
- Maintain databases to help track financial adequacy
- Valuing insurer securities
- Help with info on pricing and coverage
- Produce publications on insurance issues
- Expert advice about financial regulation and market conduct regulation
How do insurers benefit from legal uniformity?
- Agency and claims adjuster licensing standards, pricing and coverage makes easier and smoother
- Multistate insurers, easier and less expensive for compliance if state requirements are similar
Why are some model laws never adopted?
- May view law as inappropriate or unnecessary due to coverage in other state laws
- Can modify the law to meet specific state needs
- May not be as important as other regulatory objectives
What is the NAIC Accreditation Program?
Basic standards to improve the quality of insurance company solvency regulation by the individual states
What are the major steps of the NAIC Accreditation Program?
- Commissioner submits a request for review by NAIC
- NAIC review team visits department
- Team reviews department by interviews, review laws, prior exam reports, organizational and personnel policies, etc.
- Review team meets with Financial Regulation Standards Accreditation Committee to decide if they are accredited or make required changes
What are the 3 criteria to be accredited?
- Laws and regulations meet basic standards of NAIC models
- Regulatory methods must be acceptable
- Department practices must be adequate
What are some constraints DOIs face with NAIC standards?
- Regulation changes and DOIs may not have budget/capacity to keep up
- State legislators may meet infrequently
- Acceditation program has too much authority (some say)
What are the 9 main functions of the DOI?
- Licensing companies
- Regulate coverage and pricing
- Conducting exams
- Licensing producers
- Regulating claims adjusters
- Fraud
- Determining need for Receivership
- Consumer services
- Monitor investment activities
4 types of filing laws
- Prior Approval
- File and use
- Use and file
- No file
4 reasons for rate/coverage dissaproval
- Not in public interest
- Illegal
- Unfairly discriminatory
- Excessive, Inadequate, not meeting minimum standards
Purpose for Financial Exams
- Early detection of insurer’s in financial trouble or engaging in unlawful activities
- Develop information needed for timely, appropriate regulatory action
- Adequate reserves
- Reliability of financial reports
Purpose of Market Conduct Exams
- Ensure companies are complying with state laws and regulations
- Sales, UW, Pricing, Claims
Primary purpose of rate regulation
- Protect policyholders
- Ensure solvency
- Ensure rates are not inadequate, excessive or unfairly discriminatory
- Affordability and availability
How is pricing different from other industries?
- Costs are not known upfront
- State regulation
- Information - sharing mechanisms
What causes different degrees of rate regulation?
- More Regulation - Complex rating, compulsory, voter interest
- Less Regulation - Individualized, knowledgeable buyers/sellers, no statistical info
Political Theory of Regulation
Regulatory attention can be greatest that attracts substantial voter interest and are easy for policymakers to understand
How can rating bureaus increase competition?
- Large database of credible data - allowing smaller companies to compete
- Lower entry cost to newer companies
- Reduce expenses
How can rating bureaus be anti-competitive?
- Rate setting in concert
- Collusion in setting rates
Statement of Principles or Ratemaking
- A rate is an estimer of the expected value of future costs
- A rate provides for all costs associated with the transfer of risk
- A rate provides for all costs associated with an individual risk transfer
- A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is anactuarially sound estimate for the expected value of future costs associated with an individual risk transfer
Most common reasons for insolvency
- Rapid premium growth
- Inadequate rates or reserves
- Unusual expenses/CAT event
- Uncollectible reinsurance
- Fraud
2 main steps of the regulatory intervention process
- Fact Finding - IRIS/RBC/Annual statements, insurer manangement and actuarial reserve opinion
- Company intervention - Mandatory corrective action, Administrative supervision, Receiverships
4 stages of regulatory intervention for a financially troubled insurer
- Mandatory Corrective Action - Required to make correction actions by regulators
- Administrative Supervision - Required to get regulatory approval for most actions
- Rehabilitation - Receiver safeguards assets, tries to improve company or prepare for liquidation
- Liquidation - Receiver sells off assets, pays of creditors, company goes out of business
Mandatory Corrective Action (NAIC Hazardous Condition Regulation)
- Perform actions to reduce liabilities
- Limit NB or runoff RB
- Reduce general or commission expenses
- Increase surplus
- Suspend dividend payments
- Limit/withdraw from certain investments
Administrative Supervision (Model Supervision Act)
May require permission before:
* Selling assets/in force business
* Withdrawing/Investing funds
* Incurring debt
* Accepting new premiums/renewing policies
* Entering into reinsurance agreement
* Management changes
* Increasing director compensation
Receivership and two outcomes
- Type of bankruptcy where the commissioner becomes/assigns a receiver to take control of the company’s assets and liabilities
- Outcomes: Rehabilitation and Liquidation
Rehabilitation
- Attempt to save the company while the company still exists
- Rehabilitation period to assess the insurer’s financial situation by comparing assets to liabilities
- If rehab is feasible, often try to find an investor to invest capital, perhaps for ownership
Liquidation
- Assets are insufficient to pay liabilities and the insurer ceases to exist
- Either transfer business to other insurers or sell all assets and terminate business
