Porter - Chapter 2 Development of Insurance Regulation Flashcards
What are the primary purposes of Insurance Regulation?
- Protect Insurance Consumers
- Prevent Insurer Insolvencies
- Promote Competition (ie Anti Trust)
What is the pre-SEAU history of insurance regulation in the US
- Paul v. Virginia (1869): Insurance not Interstate Commerace, states regulate
- High competition led to insolvenices which led to assoctions & compacts controlling rates (evenutally leads to SEAU)
- Compacts suppressed open competition which led to antitrust questions
- Sherman Anti-Trust Act 1890: prohibits collusion to get monopolistic power
- Clayton Anti-Trust Act 1914: made activities illegal that lessened competition (ie price discrimination, tying)
- Robinson-Pateman Act 1936: ammendment to Clayton that prohibited price discrimination except where differential is justified.
Pre-SEAU why did the Sherman, Clayton and Robinson-Pateman Acts not apply to insurance?
The Paul vs. Virginia decision said that insurance was not intersate commerace and thus not subject to Federal regulation.
What events lead to the SEAU case?
- Paul v Virgina said states regulate insurance
- SEAU was a compact that controlled 90%% of business in southeast
- Fixing rates, fixing commissions, etc.
- In 1942 DOJ (Department of Justice) indicted SEUA on 2 violations of the Sherman Antitrust Act:
- rate-fixing and subsequent boycotting of agencies who didn’t go along with rate-fixing
- monopolization of market
What is the FIR of the SEAU Case?
Facts, Issues, Rulings
Facts:
* In 1942 DOJ (Department of Justice) indicted SEUA on 2 violations of the Sherman Antitrust Act:
* rate-fixing and subsequent boycotting of agencies who didn’t go along with rate-fixing
* monopolization of market
Issues
* Can Federal government regulate the business of insurance
Rulings
* District Court said no federal authority
* Supreme Court said yes, Federal Authority recognized as Insurance is commerace unders Constitution Commerace Clause (like electricity)
* Sherman Anti Trust Act now applies
What was the impact of the SEAU decision?
what events.
- Sherman Anti Trust applies to insurance making compacts rate fixing illegal.
- Gave authority to federal government to regulate.
- States pressured congress to return authority to states, leading to the McCarran-Ferguson Act
- 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
What did the McCarran-Ferguson Act do?
- Returns regulation of insurance to the states
- Sherman, Clayton, FTC, and Robinson-Patman Acts apply to business of insurance only if the states are not regulating the activities. But,
- Sherman Act applies to insurers’ antirust activities regardless of state regulation
- federal laws applying exclusively to insurance supersede state laws
Does not define business of insurance. What does regulated mean?
What are the exemptions to McCarran-Ferguson?
FEDERAL govt may regulate insurance if
- states are NOT regulating insurance
- Sherman Act applies (boycott, intimidation by insurer)
- if Congress passes an applicable law (supersedes state law) specific to business of insurance
What was the purpose of NAIC model laws?
Identifying unfair trade practices and reducing federal intervention.
- Model law to limit regulation of insurance by federal government
- Model law to prohibit certain anti-competitive activities
- Model law to promote equitable ratemaking
After McCarran-Ferguson what were the areas of focus for regulation?
1) Insurer Insolvencies (Guaranty Fund Model Act, Early Warning Tests ie IRIS)
2) Unavailable and Unaffordable Insurance Coverage (FAIR Acts, NFIP, Risk Retention Act)
3) Inequitable Treatment of Insurance Consumers
What is Surplus Lines Insurance?
- For consumers unable to find protection
- Written by non-admitted insurers for unique or high risk insureds
- Does not have to abide by all state regulations
- Have leeway in rates, coverage, and the matter of guaranty funds
fill a need in the market that admitted insurers won’t.
How are Surplus Lines insurers regulated?
- misconception that surplus lines are unregulated.
- Only licensed surplus producers are permitted to place surplus lines business.
- Coverages for the risk must be unavailable in the admitted or licensed market
- unauthorized/non-admitted insurers must meet specified financial and managerial requirements
What are the exemptions that Surplus Lines have?
- from filing rates
- benefit: insurer can always charge adequate premium
- from guaranty funds
- costs of fund not passed on to policyholder
- but no consumer protection in event of insolvency.
What is the purpose of the Gramm-Leach-Bliley Act?
- In 1990’s affiliations between banks (federal reg) and insurers (state reg) developed leaving question who regulates
- GLB specifies that each segment of financial services is regulated separately.
What are the primary provisons of Gramm-Leach Bliley ACt?
- Requires disclosure of information-sharing practices between banks and insurer affiliates
- Prohibits the formation of insurance-selling subsidiaries by national banks
- Prohibits banks from selling insurance as states can’t make laws to prevent banks from selling insurance
- However, banks can arrange for financial holding companies to create insurance affiliates
- Prohibits use bank funds to pay claims
- FACILITATES selling insurance in more than 1 state by a single producer
