Porter 2 Regulation

Question 1

Paul v Virginia (1869)

Answer 1

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 US Constitution
* Reason: Insurance is a contract delivered locally, not interstate commerce, so federal legislation doesn’t apply.

Question 2

Sherman Antitrust Act (1890)

Answer 2

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

Question 3

Clayton Antitrust Act (1914)

Answer 3

Prohibits activities that encourage monopoly power specifically [TEMPO]
* Tying - requiring purchase of 1 product to purchase another
* 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 2 competing corporations

Question 4

Robinson-Patman Act (1936)

Answer 4

Amendment to Clayton Antitrust Act
* Price discrimination - must be based on reduced operating costs of corporation

Question 5

US v SEUA (South-East Underwriters Association) (1944)

Answer 5

Facts:
* In 1942 DOJ indicted SEUA on 2 violations of 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.
* 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)

Question 6

NAIC responses to US v SEUA & McCarran-Ferguson Act

Answer 6

• US v SEUA: 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.
• McCarran-Ferguson: 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. Motivation was to identify unfair trade practices and reduce federal intervention.

Question 7

McCarran-Ferguson Act (1945)

Answer 7

• 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

Question 8

Gramm-Leach-Bliley Act (1999)

Answer 8

• Removed barriers between banking, securities, and insurance companies.
• 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
• Prohibits preventing banks from selling insurance
• Facilitates selling insurance in more than 1 state by a single producer

Question 9

Types of regulatory exemptions for surplus lines and the benefits to policyholders

Answer 9

• Exemption from filing rates: insurer can always charge adequate premium
• Exemption from guaranty funds: costs of fund not passed on to policyholder

Question 10

Ways Surplus Lines market is regulated

Answer 10

• 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

Question 11

Ways insurers are regulated by states

Answer 11

Financial regulation:
* capital requirements
* restrictions on investments

Market conduct:
* sales & advertising
* underwriting
* claims handling

Licensing:
* insurer licensing
* producer licensing