Regulation misc Flashcards
federal areas of exclusive authority (Sect 91 BNA ACT)
(rbc bat):
- regulation of trade, commerce
- banking
- criminal law
- bankruptcy, insolvency
- aliens & naturalization
- taxation
provincial areas of exclusive authority (Sect 91 BNA ACT)
- provincial taxes
- civil property rights
- hiring & supervising provincial employees
- operating jails & hospitals
define intra vires, ultra vires
- intra vires: within the power of a particular government
- ultra vires: beyond the power of a particular government
areas & matters under provincial insurance legislation/regulation
contract matters (ppp-ird):
- policy contents
- policy terms
- premium payment
- insurable interest
- reinstatement
- designation of beneficiaries
transaction matters (AUC):
- agent licensing
- unfair practices
- claims handling
examples of federal regulation/legislation regarding insurer solvency
- conditions for entering business
- investments
- regular reporting
- calculation of assets & reserves
- protect policyholders
OSFI licensing requirements for domestic insurers
- financial resources must be sufficient
- business plan detailed & realistic
- business record of applicants (check for past bankruptcies)
- character, competence, experience of management
- positive effect on Canadian financial system jobs, GDP growth
- if owned by a foreign parent, OSFI must be satisfied that subsidiary will be treated fairly
reasons for insurance regulation in Canada
- prevent insolvencies
- prevent undesirable business practices
- consider economic impact on Canada
types of insurance carriers
- individual U/W
- joint stock co.
- mutual ins. Co
- reciprocal/inter-insurance exchange
define individual U/Ws
like a stock exchange but only open to members (U/W members & non-UW members)
define joint stock company
for-profit and owned by stockholders but managed by BoD
profits -> stockholders, investors
define mutual ins company
owned by policyholders, profits paid to policyholders as dividends
define reciprocal/inter-insurance exchange
unincorporated association of subscribers who exchange contracts of indemnity (don’t issue policies, members are individually liable)
why are insurers partly exempt from anti-trust laws
short-term price competition bad (leads to underpricing & insolvency, which hurts customers)
what do rating bureaus do
promulgate rates, terms of contracts - it is an approved way for insurers to cooperate in setting adequate rates
legal status of rating bureaus
they are authorized, regulated by Provincial Insurance Acts
how do rating bureaus collect & analyze data
provincial superintendents appoint a statistics gathering agency (usually the statistical division of IBC)
what does Insurance Forms Manual Services publish
standardized version of basic policies, options, so there is no competition on basis of policies in Canada
IBC’s objectives
(SCEDP):
- study legislation
- collect/analyze data
- engage in research
- discuss general insurance
- promote public understanding
what has been the focus of Canadian Insurance Regulation since Confederation
(MOTHS):
- marketing: marketing integrity & improvement of insurance contract
- ownership: encourage Canadian ownership
- taxes: collection of taxes
- honesty: honesty & competence of intermediaries
- solvency: keep insurer’s solvent to protect policyholders
identify examples of Canadian regulation/legislation (federal or provincial) that promote insurer solvency
(CIRCA-F):
- creation: oversee creation of domestic & licensing foreign of insurers
- investments: restrictions on types of investments that are permitted to reduce risk
- rating: authorization of rating bureaus for info-sharing
- compliance: give government departments authority to enforce compliance with legislation
- adequacy: create boards to oversee and ensure adequacy of rates
- fill F/S: require regular filing of financial statements
what conditions eventually led to public control regarding solvency
- insurer bankruptcies in the 1860s/70s
- the recognition short-term price competition is bad
- insurance involves a significant savings component (prepaid premiums) & policyholders must be protected
how does federal legislation protect Canadian insureds of foreign insurance companies
- foregin insurers must maintain sufficient assets in Canada for recovery from insolvency
- if foreign insurer goes insolvency then a Canadian insurer can assume control over assets (help stop expatriation of capital)
what are the superintendent’s power over marketing practices
investigate, order persons to stop offensive practices
what are the different levels of insurance regulation
- legislation
- regulations by lieutenant governor in council
- guidelines by superintendents
difference between guidelines & legislation for insurance regulation
- guidelines are more flexible than legislation
- legislation must go through senate, house of commons, and get royal approval
why are uniform guidelines easier to establish than uniform legislation
guidelines do not need to go through the legislative process (reports & readings in the House of Commons & Senate, Royal Assent)
cite a case Privy Council used against Fed efforts at insurance regulation
Citizen’s InsCo vs. Parsons
who oversees Canadian solvency regulation
both federal and provincial - cooperative federalism has been achieved in practice
who oversees Canadian rate regulation
provincial
why is provincial insurance legislation so uniform across provinces
primarily due to CCIR (Canadian Council of Ins Regulators)
differences between private & social insurance
- selectivity: private insurers are more selective, social insurance is less selective
- solvency: private companies monitored by superintendent, social insurance underwritten by government
- employees: private insurers have private employees, social insurance has civil servants
- fraud protection: yes for private insurers, not as much for social insurance
similarities between private & social insurance
- both protect insurance fund
- both prevent over-compensation
- both need to define ‘covered event’
- both need to determine ‘covered losses’
- both need claims & reserving functions
definition of ‘principle of indemnity’
after covered loss, return insured to former financial position before loss, and neither penalize nor reward
definition of ‘contract of indemnity’
contract where amount recoverable is measured by insured’s pecuniary loss
is paying fixed amount on event occurrence considered indemnity
- no, because insured doesn’t have to have a loss
-> i.e, pay a fixed sum if temperature at winter carnival stays above 0
-> i.e, because the carnival would be cancelled due to warm weather
is a life insurance policy an indemnity policy; explain
- no, because a loss of life cannot be indemnified
- life insurance is a contract thatpays a certain sum upon death (irrespective of pecuniary loss)
conditions for recovering under an indemnity policy
- event must be covered
- requires proof of amount of loss
the difference between a ‘valued’ policy & a ‘typical’ insurance policy
proof of amount of loss not required because compensation is pre-determined by contract
the necessary conditions for reimbursement under ‘valued’ insurance policy
- event must be covered
- requires proof of loss, but not amount of loss
differences between group, individual insurance
- insures class of people vs. individuals
- contract is between insurer & sponsor vs. insurer & insured
- contract is open-ended (i.e, new employees covered automatically) vs. (going through U/W process)
- treated differently by provincial legislation vs. individual insurance
contrast group insurance with subscription policies
- group: one insurer covers many insureds
- subscription policy: multiple insurers U/W different aspects of complex risk
important intent of doctrine of subrogation
prevent over-compensation of insured
tort recovery vs. collateral sources: identify 4 loss-sharing options
(ECRR):
- election (pick one of tort recovery or collateral source)
- cumulation (pick both tort recovery and collateral source)
- reimbursement (amount not covered by tort recovery is covered by collateral source)
- relief (tortfeasor’s liability reduced by collateral source)
common examples of financial derivatives
- options
- forwards
- futures
- swaps
identify advantages of foreign participation in the Canadian insurance industry
- competition: produces lower prices, higher availability for Canadians
- innovation: good for consumers
- foreign capital: flows into Canada
describe the continuum of rate regulation approaches
- active regulation (government mandated, prior approval)
- moderate rate regulation (file&use, use&file, flex rating)
- competitive (file only, open competition)
describe the rate regulation approach: government mandated and example
- government set rates, rate changes, risk classification
- example: ABGRID, BC
describe the rate regulation approach: prior approval and example
- regulator approves rates, rate changes, risk classification before use
- example: ON major filing
describe the rate regulation approach: file & use and example
- insurer files rates, rate changes, risk classification
- regulators have a set period to approve/disapprove otherwise rates can be used 30-90 days
- filing docs are simple than for prior approval
- example: PEI
describe the rate regulation approach: use & file and example
- insurer uses rates, rate changes, risk classification and file with regulators
- regulators can retroactively change rates within a certain period
- example: QC
describe the rate regulation approach: flex rating and example
- insurer uses rate, rate changes, risk classification provided rate changes are within a certain range
- example: not used in Canada
describe the rate regulation approach: file only
- insurer files rates, rate changes, risk classification
- but no review or approval is required
describe the rate regulation approach: open competition and example
- no filing required
- Nunavut, Yukon
identify the main regulatory concerns for auto insurance
availability & affordability
which provinces/territories use 1 approach for all required vehicles
- NS (prior approval)
- PEI (file & use)
- YK, NV, NWT (open competition)
external conditions affecting rate regulation
market cycles, economic conditions, politics
consistent with provincial regs? BC private insurer files COLL and COMP changes and waits for approval before using rates
no - coll&comp are optional coverages and optional coverages are governed by open competition
consistent with provincial regs? AB acts a monopoly in providing insurance for TNCs
No - TNC is provided by private insurers
benefits to policyholders of switching from prior approval to use & file
- less rate volatility (faster rate updates, lower price swings)
- lower rates (due to lower filing costs because filings are less complicated)
insurers like use & file: - if more insurers are operating -> more competition & innovation -> good for consumers
- regulators can then focus on solvency which protects policyholders vs. worrying about rate approval
advantages to flex rating
- less volatility in rates (rate changes must be within a specified range)
- lower expenses vs. prior approval
define credit score
an insurance score using attributes found in a credit report
what are credit score used for
- U/W criterion
- rating variable
- assignment to tiers and/or RSPs or FARM
arguments in support of using credit scores
statistically significant:
- high credit score individuals have lower claim costs
(improves segmentation and availability/affordability)
- note that removing credit score will not change aggregate premium collected
has qualities of good rating variable:
- easy to calculate, objective, verifiable
arguments against using credit scores
- unfairly discriminatory: poor families, recent immigrants
- privacy concerns: too invasive
- accuracy: credit bureau errors or identity theft may cause inaccurate credit data
- high credit-score insureds: often pay small claims out-of-pocket so their true costs may be understated
regulator’s concerns in economic crisis
on aggregate premium:
- an unwarranted increase (a new rating variable alone shouldn’t increase aggregate premium)
on individual premium:
- a distributional shift that doesn’t reflect true cost differences
actuary response to regulator’s concerns over credit score use after economic crisis
for aggregate premium:
- apply off-balance to reverse aggregate change
for individual premium:
- stop using credit score at least temporarily
- redo classification analysis after economy has stablized
IBC’s guidelines on the use of credit information
- laws: comply with all local laws®ulations
- accuracy: credit info should be up-to-date&accurate
- consent: require informed/deemed consent
- privacy: take reasonable steps to address privacy concerns
- cannot: quote/deny/cancel based solely on credit
requirements for a credit-score consent request for personal insurance
- authorization from the customer to access the credit information
- what info will be collected
- how info will be used
- notify consufer that they have a right to withdraw consent
considerations when using aggregate credit scores by postal code for pricing
- postal codes: insurer needs way to handle low-credibility postal codes
- laws: comply with all local laws®ulations
- accuracy: credit info should be up-to-date&accurate
- consent: require informed/deemed consent
- privacy: take reasonable steps to address privacy concerns
identify the levels of government involvement in insurance + examples
- government as sole provider (CPP)
- government as a provider in partnership with private insurance (crop reinsurance)
- government as a provider in competition with private insurance (WC in some states)
reasons for government participation in insurance
- for filing needs unmet by private insurance (terrorism)
- when insurance is compulsory (BC auto)
- for convenience (flood)
- government may already have necessary structures in place - for efficiency (auto)
- agent commissions eliminated -> lower expense ratio -> lower premiums for consumer - for social purposes (medical, CPP)
- private market is motivated by profit
- this is sometimes at expense of social purposes like universal medical coverage
flood basically can be used as examples for 1,3,4
why might government insurance succeed where private insurance fails + examples
government insurance can subsidize losses through taxes
how can government insurance subsidize losses
- general tax revenue
- charge less than the actual cost of insurance and fill gap with special fund
why might government insurance exist when insurance is compulsory
if private insurance is not available:
- government would be sole provider
if private insurance is available:
- profits should be limited due to guaranteed market that government created
- government involvement could accomplish this
identify a private market mechanism that provides compulsory insurance to high-risk insureds
residual market or risk sharing pool
why may government insurance be more convenient to operate + example
- may already have necessary structures in place
- example: DFAA already exists and dovetails with insurance for flood & terrorism
(DFAA stands for disaster financial assistance arrangements)
why may government insurance be more efficient for auto insurance
eliminate commissions -> reduces expenses -> lowers premiums
why may efficiency of government insurance be overstated
- other government departments may already be performing services normally provided by insurer
- but the cost of these services may not be included in expenses
examples: investing, property appraisal
why may government insurance be better at social purposes + examples
- motivation: private insurance is motivated by profit not social purposes
- complexity (CPP): some programs are too large&comprehensive for private companies
- legislation: enact building codes for risk mitigation
identify criteria that a government insurance program should satisfy
- is it welfare or insurance
- is it efficient
- is it necessary
what are the differences between insurance and welfare
- insurance: pays upon covered loss regardless of need (funded by insureds)
- welfare: pays based on need (funded by general tax revenues)
reasons to support public auto insurance
- filing unmet needs: coverage may not be available or affordable for young males
- efficiency: eliminates commission -> reduces expenses -> lowers premiums
- social purposes: ensures universal coerage and sustainability through general tax revenues if necessary
reasons to eliminate public auto insurance
- private insurance can do it
- private insurance can offer more customize policies
- efficiency maybe overstated
reasons for government participation in terrorism insurance
filling unmet need:
- private market withdrew terrorism coverage after the 9/11/NYC terrorist attacks
- people expect assistance in recovering form terrorism
convenience:
- necessary structures already in place
what are the component benefits of Ontario’s mandatory auto insurance system
- no fault (accident benefits): provides benefits regardless of fault
- tort (bodily injury): allows you to sue the at-fault driver
causes of unfair delivery of auto insurance benefits in Ontario
(CLEV):
- cost control at the expense of care: insurers emphasize cost control instead of care, but then victims don’t recover and final costs are higher not lower
- lawyers: lawyer’s contingency fees are a percent of the settlement, so lawyers seek higher settlements, not better care for victims
- entitlements: victims seek to maximize entitlements vs. addressing own care needs
- volume: providers are paid on volume of treatment not results
action items in Ontario’s five-part action plan for addressing the unfair delivery of benefits
- structural flaws
- catstrophic injuries
- lawyers
- care not cash
- smart regulation
explain the action item: structural flaws
fix structural flaws by appointing an arms-length regulator with powers to enact policies&procedures
explain the action item: catastrophic injuries
change compensation system for catastrophic injuries because lawyers are taking too big of a chunk
explain the action item: care not cash
focus on timely, appropriate medical care, not cash payouts
explain the action item: lawyers
make contingency fees transparent and simplify benefits so there is less need to hire lawyers
explain the action item: smart regulation
allow insurers more regulatory freedom to compete on price & service
what is the ‘opportunity gap’ in Ontario auto insurance
there is an opportunity for Ontario auto premiums to be much lower without impacting quality
what is the ‘value gap’ in Ontario auto insurance
the value of medical care could be better if there were more focus on active medical management
