Principles of Insurance Regulation

Question 1

The Allocation of Regulatory Powers

Answer 1

a. Paul v. Virginia, the U.S. Supreme Court held that insurance is not commerce under the Commerce Clause

b. U.S. v. South-Eastern Underwriters overruled Paul, holding that transactions can be commerce.

c. The National Association of Insurance commissioners quickly prepared and lobbied for Congress to return regulatory authority to the states, which it did by passing the McCarran-Ferguson Act of 1945.
i. “No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . .”
1. Excepted: Sherman Act, Clayton Act, Federal Trade Commission Act, unless regulated by the States
ii. Rejects the “dormant” commerce clause by specifically stating that “the business of insurance . . . shall be subject to . . . the several states . . .”

Question 2

Rationales for Solvency Regulation

Answer 2

1. Insurer’s use policyholder instead of lenders to fund their operations
   a. Policyholders can’t monitor and set terms like lenders can
2. Public policy for ensuring policyholders’ claims are paid

Question 3

The Tools of Solvency Regulation

Answer 3

1. The NAIC’s Financial Standards and Accreditation Program
   a. Accredited state insurance departments are permitted, but not required, to defer to the solvency regulation of an insurer’s state of domicile, so long as that state of domicile is itself accredited.
2. Accounting and reporting
3. Capital requirements – most fundamental
   a. Fixed capital requirements
   b. Risk-Based Capital (RBC) requirements – much more important
   i. Required capital depends on the insurer’s (1) riskiness and (2) size
4. Reserve requirements
5. Investment restrictions
6. Financial monitoring – Insurance Regulatory Information System (IRIS)
7. State guaranty funds – funded by insurer licensing

Question 4

Anthem Health Plans of Maine v. Superintendent of Insurance

Plaintiff wanted to increase its rates by 9.2% for a 3% profit/risk margin, but the commissioner determined the right balance between consumers and insurer was a 5.2% increase for a 1% margin.

Answer 4

Some states regulate insurance rates to ensure rates are neither excessive for consumers nor inadequate for insurers’ financial integrity.

Question 5

Allstate Insurance Company v. Schmidt

The plaintiffs were fined for violating a statute that prohibited basing “any standard or rating plan” on an applicant’s length of driving experience. Plaintiffs argued the statute didn’t apply to underwriting, but only to rate making.

Answer 5

If a statute is ambiguous as to whether it applies to underwriting or to setting insurance rates, a court should give effect to all parts of the statute to clarify the ambiguity.

Question 6

Policy Form Regulation

Answer 6

i. States regulate the content of insurance policies in consumer-oriented markets
1. Cannot be unfair, ambiguous, unreasonable
2. Compliance with state rules

Question 7

Market Conduct Regulation

Answer 7

i. Advertising/marketing restrictions

ii. Resolving claims

Question 8

Residual Market Mechanisms

Answer 8

i. Insurance Information Institute, Residual Markets (2009)
1. States provide auto coverage for those who can’t get it in the private market

Question 9

i. Patrick O. Ojo v. Farmers Group, Inc.
1. Facts: Plaintiff alleged discrimination under the Fair Housing Act when defendants used credit scores to determine eligibility for its housing insurance products. However, the McCarran-Ferguson Act states that Congress cannot impede any state laws that regulate insurance. Texas law permits insurance companies to use credit scores.