Regulation of Insurance and U.S. Insurance Law Flashcards
Paul v. Virginia
Year: 1869
Paul applied to become a license insurance agent in VA for NY insurers. VA denied this because NY insurers had not deposited required foreign insurer bond. Paul sold policies anyways and was arrested. Paul appealed his conviction up to the U.S. Supreme Court
Main Outcome of Paul v. Virginia: Insurance is regulated at the state level and is not interstate commerce. States could continue to regulate own insurance market without violating the Constitution.
National Insurance Convention
Year: 1871
mid-1800s, more insurers were operating in several states and were therefore dissatisfied with the Paul v. Virginia decision
Insurers were having problems meeting various state demands: states regulated different areas & implemented such regulation differently
Actions taken by the National Insurance Convention (NIC)
Formed in 1871 by representatives from 19 different states:
-Developed a constitution setting forth the regulators’ goals
-Designed a uniform accounting statement
-Adopted guidelines for insurer taxation
-Adopted first model law which covered items such as Commissioner’s duties and the Regulation of Fire, Life, and Marine insurers
Sherman Antitrust Act
Year: 1890
The Sherman Antitrust Act of 1890 is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. Goal was to stop big businesses from dominating the market and hurting consumers/competitors.
*Did not apply to the insurance industry because insurance was not classified as interstate commerce.
However, this Act gave states motivation to pass their own antitrust laws against controlling rates: prohibited insurer compacts/associations from controlling rates.
Clayton Antitrust Act
Year: 1914
Identified and made illegal activities that lessened competition or created monopoly power
*Because insurance is regulated at state level, it is not subject to these acts
Robinson-Patman Act
Year: 1936 (an amendment of the Clayton Act)
-Required that price differences be justified by differences in operating costs (made price discrimination illegal)
-Made tying illegal, which is requiring purchase of 1 product to purchase another
Wanted to prevent insurance companies from reducing prices purely to drive out competitors
*Because insurance is regulated at state level, it is not subject to these acts
What is the South-Eastern Underwriters Association (SEUA)
A compact of almost 200 insurance companies operating in the southeast of the U.S.
Compacts were formed by insurers to control rates which deterred open and free competition
The SEUA caused a Federal Investigation due to activities banned under the Sherman Act such as:
-Fixing premium rates and agents’ commissions
-Using boycott and other forms of coercion and intimidation to force non-SEUA members to comply
-Threatening insurance consumers with boycott and loss of patronage if they didn’t purchase insurance from SEUA members
-Withdrawing rights of agents to represent SEUA members if they also represented non-SEUA members
2 key questions considered by the court when making the SEUA decision
- Did Congress intend the Sherman Act to prohibit the insurer’s conduct of restraining/monopolizing business? Yes
- Do insurance transactions across state lines constitute “commerce among several states,” which will subject them to Congressional regulation? Yes
What was the immediate effect of the SEUA decision?
Year: 1944
Federal legislation now applied to insurance (This includes the Sherman Act, the Clayton Act, and the Robinson-Patman Act)
Reaction to SEUA decision
-NAIC did not like the federal regulation of insurance. Its recommendation is these laws exclude insurance and that insurance regulation be brought back to the states.
-State regulators and insurance industry believed some forms of cooperation necessary (establishing statistical base for adequate rates)
McCarran-Ferguson Act
Year: 1945
Returned regulation of insurance back to the states. Justification for this was that it was “in the public interest.”
Essentially gave NAIC and insurance industry what they wanted.
What are the exceptions to the McCarran-Ferguson Act
-If states are not regulating the activities (Federal antitrust laws will apply if states do not regulate these activities)
-Sherman Act continues to apply to the use of boycott, coercion, or intimidation
-If Congress passes a law that applies only to the insurance industry, it will supercede any state regulation (Federal laws enacted specifically to regulate the “business of inusuance” preempt any state laws that apply to the same activities addressed by the federal laws)
NAIC approved two model rate regulation bills with the following purposes:
-Ensure rates are not excessive, unfairly discriminatory, and are adequate
-Allow cooperation in setting rates, as long as it didn’t hinder competition.
FAIR Plans (Fair Access to Insurance Requirements)
To address the availability of insurance, many states have formed FAIR Plans. Regulators are concerned when consumers cannot obtain insurance coverage when they need it at an affordable price.
Insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties (especially those susceptible to loss by riot or civil commotion)
Captive
Another way to address availability of insurance.
Captives are insurers/insurance companies that the insureds own and control.
Single-Parent Captive
Has one parent company and insures that company and/or its subsidiaries
Group Captive
Is owned by a group of companies, usually in similar businesses (Uses an insurer to act for them or operate under the federal Risk Retention Act)
Surplus Lines
Insurance coverages obtained from nonadmitted insurers when protection is not available from admitted insurers.
-Provide coverage for risks that are unique, require high limits, or have difficult underwriting practices
-Makes unique coverage available and affordable
