Section A Flashcards
List and Describe the Types of insurers
09 - Baer and Rendall
- Individual Underwriters - rare in North America
o Example is Lloyd’s of London
o Does not act as an insurer, nor does it have liability on policies issued by UW
o Similar to a stock exchange (provides a market place and regulates trade practices), except only open to members, not the public - Joint Stock Companies
o For-profit organization, composed of stockholders and is controlled by its officers and a board of directors - Mutual Insurance Carriers
o Corporate enterprises whose voting control rests with policyholders not stockholders
o Some profit is distributed to members as dividends, the rest is retained in reserves - Reciprocal or Inter-Insurance Exchanges
o An organization of individuals who have joined together for the exchange of insurance
o Does not issue policies itself, but no participant can take out insurance unless offering insurance in return
o Members are individually liable, NOT jointly liable
What are the reason(s) insurance is exempt from anti-combines legislation?
09 - Baer and Rendall
• Uncontrolled price competition is not in public’s long term interest
o Insurers would collect less in premiums than necessary to meet future liabilities
o Increases insolvency risk – Bankruptcy could have catastrophic effects
o Special rules are necessary to guarantee their continued solvency
• Industry encouraged to charge adequate premiums, usually through the authorization of rating bureaus
What are the 5 objectives of IBC?
09 - Baer and Rendall
- Discuss General Insurance
- Collect & Analyze statistical info
- Study Legislation
- Research and pilot programs
- Promote better public understanding of insurance
Where are the 5 main areas that Canadian insurance has focused on?
09 - Baer and Rendall
- Solvency – Guarantee the financial solvency of insurers
- Canadianization – Promote Canadian ownership of insurers and Canadian investments
- Government Revenue – Promote revenue collection
- Regulating the Contract – Promote market integrity and improve the insurance contract
- Control over Insurance Intermediaries – Promote honesty and competence of insurance intermediaries
How has Canadian legislation prmoted solvency?
09 - Baer and Rendall
- Controlling the creation of domestic insurers, licensing foreign insurers
- Limiting the types of investments insurers could make
- Requiring periodic filing of financial information
- Creation of rating bureaus and administrative boards to encourage adequate rates
- Giving government authority to ensure compliance
Why does Canada have such strict solvency regulation?
09 - Baer and Rendall
- Loss of public confidence following bankruptcies in the 1860s/1870s
- Aggressive short-term price competition not in the public interest
- Fiduciary nature of insurance - involves the management of large pools of prepaid premiums
Why is the Canadianization of insurance important?
09 - Baer and Rendall
• 1865-77 federal legislation required foreign companies to maintain sufficient assets in Canada to meet Canadian liabilities
o Protects policyholders
o Prevented the expatriation of large amounts of investment capital
• Resulted in the withdrawal of almost half of foreign companies and the expansion of Canadian companies
What are the Forms/Levels of insurance legislation?
09 - Baer and Rendall
- Legislation
- Regulation by lieutenant governor in council
- Guidelines or directives from Superintendent
Why are guidelines favored over other forms of insurance regulation?
09 - Baer and Rendall
- Seen as more flexible
- Less obtrusive – to the extent that they are voluntary
- Less open to judicial interpretation – public is given no rights
- Can be adopted without being vetted by other gov’t departments - quicker to implement
What is the role of the Canadian Council of Insurance Regulation (CCIR)?
09 - Baer and Rendall
- Promotes uniformity in provincial regulation - e.g., drafting legislation
- Encourages uniform practices in the industry - industry-wide rules, common teaching for the licensing of agents
- Has a close working relationship with the industry
- Greater public input than in the case of the Privy Council
Differences between social and private insurance
09 - Baer and Rendall
- Social insurance tends to be universal in application; private insurance is risk selecting
- Social insurance has less need to protect the public from gaming
- Social insurance does not require extensive solvency rules – state is the carrier
- Different supervision of intermediaries in social insurance, as they are civil servants
Similarities between social and private insurance
09 - Baer and Rendall
- Rules to protect the insurance fund and prevent overcompensation
- Problem defining covered events and determining covered losses
- Difficulty establishing a fair and efficient claims settlement process and loss valuation
What are the possible solutions for handling multiple recovery situations?
09 - Baer and Rendall
- Election – Victim can choose his compensation source
o Recourse against the tortfeasor or compensation from collateral source - Cumulation – Insured takes and retains all damages and all collateral benefits
o Permits double recovery - Reimbursement – Tortfeasor must pay all damages and any excess, after making the insured whole, is returned to the collateral source
- Relieving the Tortfeasor – Tortfeasor’s liability is reduced by the amount of collateral benefit received by the injured
o Wrongdoer pays what insurance does not
What is the goal of subrogation?
09 - Baer and Rendall
- The current emphasis for subrogation is on compensation victims rather than admonishment (reprimand/warning);
- Because of insurance, subrogation does not put the ultimate burden on the wrongdoer
- Should ONLY be indemnified - not be able to recover from multiple sources and “gaining” from loss event
What case pertains to the classification of insurance for the purpose of regulating the contract
09 - Baer and Rendall
Regal Films Corporation LTD v. Glens Falls Insurance Company
Which case pertains to the distinction of Indemnity vs. Non-Indemnity insurance?
09 - Baer and Rendall
Glynn v. Scottish Union & National Insurance Company Ltd.
What are the requirements for duty of care to exist? What case does this pertain to?
09 - Baer and Rendall
• Will owe a duty of care if: 1. Reliance 2. Reliance is Reasonable 3. Knowledge of the Reliance • Case Fletcher v. MPI
Describe Fletcher v. Manitoba Public Insurance. What was the verdict?
09 - Baer and Rendall
Duty of Care
• Background of the case
o Insureds suffered severe injuries in an automobile accident, at-fault driver had inadequate coverage
o The victim thought they had purchased the maximum available coverage, but did not have underinsured motorist coverage (The renewal notice had the words “not applic” typed in for UMC which the victim believed meant it did not apply to him since he already had maximum coverage)
• Is there a Duty of Care owed to inform of all available coverages, their purpose, and cost?
o Will owe a duty of care if:
1. Reliance – Plaintiff relied on information provided
2. Reliance is Reasonable – Contractual right to rely on the offeror
3. Knowledge of the Reliance – MPI ought to have known of the reliance
o MPI owed a duty of care but did not fulfill it
• Verdict: Plaintiffs were awarded, in negligence and in contract, for the damages in the amount of the shortfall.
Describe the Broadhurst & Ball v. American Home Assurance Co. Case. What was the verdict? Why?
09 - Baer and Rendall
Duty to Defend
• Background of the case
o Defendant was sued for conspiracy, breach of fiduciary duty, and negligence
o Policies of both the primary (American Home) and excess professional liability insurers (Guardian) agree to provide defence against covered suits and pay associated expenses
o Excess insurer contends that the insureds were aware of the claims when they obtained insurance and thus no coverage is provided
• Three issues to be determined:
1. Coverage Issue – Should the judge have waited until after trial to decide if coverage of the claims existed?
o Allegation claims were known beforehand dismissed for lack of evidence
o Resolution of coverage issue not improper as remote possibility anything in the trial would affect coverage
2. Obligation to Defend Issue – Does the excess insurer have a concurrent obligation to defend when a primary insurer also has that obligation
o No discussion
3. Allocation of Defense Costs Issue – If an obligation to defend exists, should the excess insurer have to pay a proportion of defense costs
o Primary insurer to cover defense costs until the policy limit has been exhausted
o Potential judgment above primary limit puts excess carrier at risk (should not excuse itself)
o Equitable distribution of costs not justified on a contractual basis but by the principles of equity and good conscience
• Verdict: The cost of defense should be shared equally between insurers since both have a duty to defend and can create the best defense together. Appeal dismissed; cross-appeal allowed.
Describe the Standard of Absolute Liability. What case does this pertain to?
09 - Baer and Rendall
- Standard of Absolute Liability - If an insurer can settle a claim against an insured within policy limits and rejects it, the insurer is liable to reimburse its insured for claim above the limit
- Case: Dillon v. Guardian Insurance Co.
Describe the case of Dillon v. Guardian Insurance Co.
09 - Baer and Rendall
Standard of Absolute Liability
• Background of the case
o Dillon injured a child in a car accident and was sued for 100K but had policy limits of 50K
o Insurer fails to agree to a settlement within policy limits and is sued for the excess loss
• Standard of Absolute Liability – If an insurer can settle a claim against an insured within policy limits and rejects it, the insurer is liable to reimburse its insured for claim above the limit
o Avoids problem of determining if settlement was reasonable
o Eliminates the danger of an insurer, when faced with a decision near policy limits, gambling with the insured’s money to further its own interests
o Since insurer may reap the benefits of not settling, it should also suffer the detriments
• Verdict: Insurer did not use reasonable care in refusing to settle and is guilty of bad faith
Describe the Glynn v Scottish Union & National Insurance Company Case. What were the issues? What precedence was set?
09 - Baer and Rendall
Indemnity & Non-Indemnity Insurance
• Background
o Insureds were injured in a car accident as a result of negligence by another driver
o Insureds won a settlement from the other party AND from his own insurer for medical expenses
o The insurer appealed, Glynn double-recovered his losses
o The insurer believes that the contract was one of indemnity and that the insured should not benefit from the accident
• Each contract needs to be evaluated on a case-by-case basis to determine whether it is a contract of indemnity
o Indemnity Contract – Based upon the happening of an event that results in the insurer’s liability and loss to the insured, measured by the extent of the assured’s pecuniary loss
o Contracts which are not contracts of Indemnity – The amount recoverable, a fixed or calculable sum, is payable upon the happenings of some contingent event, irrespective of whether the assured in fact sustains a pecuniary loss
o The principle of subrogation applies only to contracts of indemnity - The assured, in case of a loss, shall be fully indemnified but shall never be more than fully indemnified
• Judge ruled that this was indemnity contract and subrogation was allowed
Describe Regal Films Corporation LTD v. Glens Falls Insurance Company. What was the verdict? Why?
09 - Baer and Rendall
Classification of Insurance for the Purpose of Regulating the Contract
• Background of the case
o The insurer issued a policy titled “Inland Marine Policy” protecting against fire, lightning, windstorm, tornado, theft, robbery, burglary, hail, explosion, etc.
o Plaintiff filed a fire claim
o Insurer resisted b/c the plaintiff had not provided proof within 60 days as per the policy
• Part IV of The Insurance Act on Fire Insurance states only that proof shall be delivered as soon as “practicable”
o Prohibits any “variation or omission of or addition to any statutory condition”
• Insurer argued the policy does not come under Part IV of the Act because it is headed “Inland Marine Policy”
• Contract fails to suggest that the loss by fire insured against is “incident to marine adventure”
o Verdict: Plaintiff received all payments for their loss and costs
Describe the difference between Valued Policies and Non-Indemnity Policies
09 - Baer and Rendall
- Valued policies involve payment of an agreed value if an insured proves occurrence of a loss - Contracts of indemnity
- Nonindemnity insurance provides a fixed sum or calculable amount based on the happening of some contigent event, regardless of whether the insured suffers a pecuniary loss
Why do government agents have less duty to advise than private companies?
09 - Baer and Rendall
- Employees are not specialists in risk advice
- Employees do not have to be licensed agents
- Private company agents provide information AND advice while the government or public agents provide just information
[Fletcher v. MPI]
List and describe the general objectives of rates?
41 - KPMG Regulatory Oversight
- Rates are adequate
• Rates are sufficient to provide for all future claims and expenses
• Contributes to maintaining insurer solvency and protecting consumers - Rates are Not Excessive
• Helps to ensure that insurance remains available and affordable - Rates are Not Unfairly Discriminatory
• Discrimination is neutral in insurance pricing meaning the ability to differentiate risks - Unfair discrimination is prohibited
• Contributes to protecting consumers and the fair treatment of customers
List the 7 Rate Regulatory Approaches
41 - KPMG Regulatory Oversight
- Government-Mandated Rates
- Prior Approval
- File and Use
- Use and File
- Flex Rating (Band Rating)
- File Only
- Open Competition (No-File)
Describe the form of rate regulation: Government-Mandated
41 - KPMG Regulatory Oversight
- Rates set by a Crown corporation, by a rating board, or rating bureau (US)
- Rates could be used exclusively by government insurers or set for private insurers
- May dictate other aspects of the insurance rate setting process
Describe the form of rate regulation: Prior Approval
41 - KPMG Regulatory Oversight
- Strict form of rate regulation when regulatory authority must approve rates beofre they can be used
- May contain a deemer provision - rates deemed approved if not dissaproved with specified time period
Describe the form of rate regulation: File and Use
41 - KPMG Regulatory Oversight
- Insurers file rates with the regulatory authority and after some defined period of time, rates are “deemed” approved
- Eliminates some of the delay with Prior Approval
Describe the form of rate regulation: Use and File
41 - KPMG Regulatory Oversight
- Insurers file rates with the regulatory authority but may begin using the new rates immediately
- Regulators have the right to disapprove rates, potentially retroactively
Describe the form of rate regulation: Flex Rating
41 - KPMG Regulatory Oversight
- Rate changes within a specified range do no require prior approval (may be file and use, use and file, or file only)
- Allows quick rate adjustments in response to changing conditions or loss experience
Describe the form of rate regulation: File Only
41 - KPMG Regulatory Oversight
• Insurers must file rates and justification, but rates are not subject to review or approval
Describe the form of rate regulation: Open Competition
41 - KPMG Regulatory Oversight
- Insurers develop and use rates without having to file or receive approval
- Prices are driven by market forces
- Regulator retains the authority to monitor competition and intervene
Provide four ways in which Use and File could be beneficial over Prior Approval
41 - KPMG Regulatory Oversight
- Decreases volatility in insurance premiums
- Less regulatory costs, thereby decreasing insurance premiums
- Lack of regulatory lag reduces the magnitude and frequency of price swings, resulting in less uncertainty
- Have smaller residual markets than prior approval
- Will likely lead to a larger number of insurers, providing more choice to consumers
- More refined classification or rating algorithm or innovation
- Regulators have more time to spend on solvency and market conduct
Describe the form of regulation for automobile insurance for each province in Canada
41 - KPMG Regulatory Oversight
• Alberta
o Government-Mandated maximum premiums for basic PPA coverage
o File and Use for the optional PPA coverages, Commercial, and Miscellaneous
• BC
o Government-Mandated - ICBC provides basic minimum coverage
o Open Competetion - ICBC and private insurers compete for optional and excess coverage
• Manitoba
o Government-Mandated - MPI provides basic compulsory coverage
o Open Competetion - private insurers compete for optional and excess coverage
• New Brunswick
o Insurance act supports File and Use whereas the Insurance Board supports Prior Approval (some form of active regulation exists)
• Newfoundland and Labrador
o File and Use - if taking a rate decrease
o Piror Approval - if seeking an increase on any risks (even if overall decrease)
• Nova Scotia
o Prior Approval
• Ontario
o Prior Approal - PPA
o File and Use - Commercial and Miscellaneous auto
• PEI
o File and Use
• Queobec
o Government-Mandated - SAAQ offers bodily injury coverage
o File and Use - Private insurers compete for property damage and personal injury
• Saskatchewan
o Government-Mandated - SAF for basic minimum coverage (liability, personal injury, collison, and comprehensive)
o Open Competition - Private insurers compete with SAF for optional and excess coverage
• Yukon, Nunavut, & NWT
o Open Competition
What are the Provincial regulatory responsibilities?
43 - KPMG PACICC
- Licensing of insurance companies
- Form regulation – Terms and conditions of insurance contracts and their interpretation
- Licensing of agents, brokers, and claims adjusters
- Market conduct, sales practices and information disclosures
- Claim settlement practices
- Compulsory insurance coverage and residual markets
- Rate regulation
- Solvency of provincially incorporated insurers
What has led to the success of the Canadian regulatory environment?
43 - KPMG PACICC
• Regulation is a collaborative process to between
o Superintendents of financial institutions (federal and provincial)
o CIA and CICA
o Representatives from the industry (such as IBC)
• Change from one organization is often complemented by actions in another
Due to insurance company failures in the 1980s, several regulatory initiatives were put forward in Canada. What are they?
43 - KPMG PACICC
- Capital surplus requirements
- Adequacy of security provided by reinsurance
- Quality and collectability of assets
- Adequacy of claims reserves
What were the 1990s changes to ICA?
43 - KPMG PACICC
- Strengthened surplus test provisions by providing minimums based on premium and claims [Bill C-28]
- Addressed excessive use of reinsurance and unregistered reinsurers [Bill C-28]
- Actuarial certifications on the adequacy of claim and unearned premium reserves
- Creation of PACICC [NOTE not a change to ICA]
- Creation of the Appointed Actuary and associated duties [Bill C-28]
o Report on value of actuarial and other policy liabilities
o Report on the financial condition and expected future financial condition
o Report on matters that may have a material adverse effect on the financial position of the company and require rectification
In the 2000s there were changes to Canadian insurance regulation. What were they?
43 - KPMG PACICC
- Discounted policy liabilities
- Implemented of the MCT
- External review of AA reports
- Accounting changes on the recognition of assets on the balance sheet
What is the purpose of the CIA?
43 - KPMG PACICC
- Advance and develop actuarial science
- Promote the application of actuarial science to human affairs
- Establish, promote and maintain high standard of competence and conduct within the actuarial profession
What are the key responsibilities of the CIA?
43 - KPMG PACICC
- Accredit actuaries in Canada
- Promote the advancement of actuarial science through research
- Promote continuing professional development activities and ensure that actuarial services provided by its members meet extremely high professional standards
What were the Crawford report recommendations?
43 - KPMG PACICC
- Adopt a new statement of purpose which gives precedence to service in the public interest over self-interest of the member
- Increase its support of research and development for P&C insurance, develop SOPs in this area, and increase contribution to basic and continuing education for its students and members in these topics
- Improve and expand its contribution to the development and direction of public policy issues through
o More effective monitoring of emerging issues
o More vigorous participation in public policy debates in a timely manner
o Strengthened contact with government regulators and policy makers
What are the objectives of the Actuarial Standards Board (ASB)?
43 - KPMG PACICC
- Provide continuous review of ASOPs
- Direct and manage ASOPs in all areas of actuarial practice
- Adopt ASOPs in all areas of actuarial practice, within its sole discretion and pursuant to such procedures as it deems appropriate
- Ensure adequate communication of SOP to everyone that needs to know
The Provision for Adverse Deviations SOP was approved in 1993. What was the purpose of this provision?
43 - KPMG PACICC
• Standard was supposed to allow actuaries to explicitly determine the provision for adverse deviations
There were 3 changes in the SOP related to margins for adverse deviations (MfAD). What are they?
43 - KPMG PACICC
(1) High margin for claims development increased from 15% to 20%
• Intent of increase was to make clearer to P&C actuaries that in times of greater uncertainty it is acceptable to select a higher margin such as 20%
• Based on actuarial judgment (limited to max of 20%)
(2) Low margin for interest rate was decreased from 50 basis points to 25 basis points
(3) Recognition of using stochastic methods to determine MfAD
What is the purpose of the DCAT?
43 - KPMG PACICC
• Purpose is to identify:
- Plausible threats to satisfactory financial condition
- Actions which lessen the likelihood of those threat
- Actions which would mitigate a threat if it materialized
The DCAT SOP addressed several issues in the CIA standards. The issues addressed are:
43 - KPMG PACICC
o Requirements for the determination of satisfactory financial condition o Length of the forecast period o Base scenario o Plausible adverse scenarios o Integrated scenarios o Ripple effects o Reporting o Opinion
Why was insurance born at the state level?
46 - Mayhall
o In the mid-1850s there was very little infrastructure or resources at the federal government level
o State governments were more developed and better equipped to undertake regulation
Why were multi-state insurer’s pro-federal regulations?
46 - Mayhall
Multi-state insurers were hampered by the inconsistency of the dissimilar rules and requirements, as well as localism, of state regulators
Discuss the ruling in Paul v. Virginia
46 - Mayhall
• Supreme Court held that insurance was not commerce and that state insurance regulation did not violate the 14th amendment
o Insurance is subject to individual state regulation
o No basis for federal regulation of insurance
Why was the NAIC formed?
46 - Mayhall
The National Association of Insurance Commissioners formed in 1871 to coordinate states activities and pool resources
Discuss the case: United States v. South-Eastern Underwriters Association (1944). What was the response?
46 - Mayhall
- SEUA overturned the earlier case of Paul v. Virginia (1869)
- Supreme Court found that insurance WAS commerce and subject to federal regulation
- Some thought this signaled the demise of state-based insurance regulation
- Led to the swift passage of teh McCarran-Ferguson Act
How did insurance avoid the sweeping federalization of financial services regulation in the United States during the 1930s?
46 - Mayhall
• The insurance industry avoided federal regulation because of the relatively healthy state of insurance and little evidence of fault on the part of state-based insurance regulators
Discuss the McCarran-Ferguson Act and why it was enacted
46 - Mayhall
• Addressed the immidate antitrust issues arising from SEUA
• Act provides that the regulation of insurance by the state is in public interest, except when pre-empted by federal law that specifically relates to insurance
• Cemented the states primacy in insurance regulation
• Identifies three federal laws that are applicable to insurance:
o The Sherman Act, the Clayton Act, and the Federal Trade Commission Act
o These are intended to prevent anticompetitive practices and unfair competition, and otherwise regulate trade to protect consumers
Discuss the Gramm-Leach-Bliley Financial Modernization Act, 1999
46 - Mayhall
- Removed many restrictions of affiliations among banks, securities firms, and insurance companies
- Set out certain minimum standards for state insurance regulation or else face pre-emption by federal law
Discuss the Patient Protection and Affordable Care Act (PPACA), 2010
46 - Mayhall
• A comprehensive reform of the health insurance market
• Creates requirements for health benefit plans to be marketed through federally-mandated state-created insurance exchanges
o Mandates coverage requirements
o Requires insurers to maintain specific medical-loss ratios
Discuss Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), 2010
46 - Mayhall
• Establishes the Federal Insurance Office (FIO)
o Studies and collects industry and state regulatory information
o Drafts proposed federal regulation framework
• Establishes the Financial Stability Oversight Council (FSOC)
o Monitors the financial service markets to identify potential risks to financial stability
o Authorized to require state insurance regulators to apply new or heightened financial standards on insurers
• Requires single-state regulation and uniform eligibility criteria of surplus lines insurance
• Mandates requirements for reinsurance credits
What are the reasons for regulation in the insurance industry? How do these relate to the considerations in licensing an insurer?
48 - McDonald
- To prevent insolvencies
• Nature and sufficiency of financial resources
• Soundness of business plans for future development - To prevent undesirable business practices
• Business record and experience
• Character, competence, and experience of company operators - To consider the economic impact
• Best interests of the finacial system in Canada
• Treatment of Canadian insurers in foreign insurers’ principle jurisdiction
Describe the British North American Act (BNA) of 1867
48 - McDonald
• Created a new federal government for the Dominion of Canada
• Distributed all powers between the federal and provincial Parliament
• Federal legislative powers includes:
o Regulation of trade and commerce; Taxation; Banking; Bankruptcy and insolvency; Naturalization and aliens; Criminal law; Residual power
• Provincial legislative powers includes:
o Incorporation of companies with provincial objects; Property and civil rights in the province; All matters merely local or private in nature
Describe the Privy Council.
48 - McDonald
• Until 1949 when the Supreme Court was created, the Judicial Committee of the Privy Council was the highest court in Canada
• Insurance was NOT specifically mentioned in the BNA Act, it was a small local industry
o Lack of clear direction resulted in a number of constitutional cases
o Dealt with whether legislation was ultra vires of the federal government
Define: Ultra Vires & Intra Vires
48 - McDonald
- Ultra Vires is beyond the powers of the government
- Intra Vires is within the powers of the particular government
Federal parliament has exclusive legislative authority over:
48 - McDonald
o Regulation of trade and commerce o Taxation o Banking o Bankruptcy and insolvency o Naturalization and aliens o Criminal law o Residual power to make laws for the peace, order, and good government of Canada in relation to all matters not exclusively assigned to the provincial legislatures
The Provincial legislature has exclusive legislative authority over:
48 - McDonald
o Incorporation of companies with provincial objects
o Property and civil rights in the province
o All matters merely local or private in nature
Citizens Insurance Co. v. Parsons
- What Act was contested? What was its purpose?
- What were the arguments of the insurance company?
- Explain how the JCPC ruled on each argument
48 - McDonald
- In 1876 Ontario enacted the Fire Insurance Policy Act which required certain considerations to be included in fire insurance policies in Ontario.
- Insurer argued Fire Act was ultra vires because it related to regulation of trade and commerce and deprived the status and capacity of federal company;
- Privy Council upheld the act
o Trade and commerce was interpreted as meaning BETWEEN provinces and did not extend to the regulation of business WITHIN a single province
o All companies treated equally under the act and did not affect their status or constitution.
Describe the Insurance Reference Case.
48 - McDonald
• 1916 – The Attorney-General for Canada v. The Attorney-General for Alberta
• Contested the federal Insurance Act (1910) which required that all insurers operating in more than one province obtain a federal license
• Regulation of trade and commerce does not extend to licensing
o Provincially incorporated insurer could operate in other provinces, without being federally regulated, with permission from those provinces
o Federally incorporated insurer does not require the provinces permission
o However, federal government can require licensing of foreign insurers
Describe the 1974 case: Canadian Indemnity Company v. Attorney General of British Columbia
48 - McDonald
• BC established compulsory auto insurance plan in 1974, eliminating private insurers
o Refused to renew licenses of auto insurers carrying on business in the province
• Arguments
o Matter is federal jurisdiction relating to the regulation of trade and commerce
o Interfered with the status and capacity of federally registered insurers
• The Supreme Court found the legislation to be within the power of the BC Legislature
What are the Federal Regulation of Insurance Duties?
48 - McDonald
• Federal power regarding the incorporation of companies with more than provincial objects but cannot interfere with provinces’ exclusive jurisdiction over insurance business
• Concern is financial soundness/solvency of foreign and federally incorporated insurers:
1. Conditions for a company to enter the insurance business
2. Financial reporting
3. Control over investments, calculation of asset values, and policy reserves
4. Protecting policyholder interests in areas other than control of insurance
What are the Provincial Regulation of Insurance Duties?
48 - McDonald
• Supervise the financial soundness of provincially incorporated insurers
• Regulatory duties relating to the insurance contract
o Policy contents, insurable interest, contract taking effect, premium payment, duty to disclose, incontestability, reinstatement, designation of beneficiaries, insured dealing with the contract
• Regulatory duties relating to insurance transactions
o Licensing agents, unfair practices, and claims procedures
What are the insurance contract matters regulated by the province?
48 - McDonald
- Contents of policy
- Insurable Interest
- Contract Taking Effect
- Payment of Premiums
- Duty to Disclose
- Incontestability
- Reinstatement
- Designation of Beneficiaries
- Insured Dealing with the Contract
What are the insurance transaction matters regulated by the province?
48 - McDonald
- Licensing of agents
- Unfair practices
- Claims procedures
The Minister of Finance considers several factors when licensing insurers; list these considerations.
How do these relate to the reasons for insurance regulation?
48 - McDonald
• To prevent insolvencies, consider the…
- Nature and sufficiency of financial resources
- Soundness of business plans for future development
• To prevent undesirable business practices, consider the…
- Business record and experience
- Character, competence, and experience of company operators
• To consider the economic impact, consider the…
- Best interests of the finacial system in Canada
- Treatment of Canadian insurers in foreign insurers’ principle jurisdiction
What impact did the ICA have on federally regulated insurers?
48 - McDonald
• Increased powers for federally regulated insurers:
- Broadened the lending and investment powers
- Increased powers to diversify
- Increased flexibility to issue shares or borrow
The ICA also instructs on how Foreign companies operate in Canada. Briefly describe the requirements of Foreign Companies.
48 - McDonald
- Foreign companies require approval of Superintendent and Minister for insuring risks in Canada
- Must be capable of making a contribution to the financial system in Canada
- Canadian insurers must be treated as favourably in the foreign insurers’ principle jurisdiction
- Must appoint a natural person who is ordinarily a resident of Canada to be its Chief Agent, who receive notices from the Office
- Must appoint an auditor and an actuary for its Canadian business
- Must have assets of a prescribed value vested in trust, in a trust approved by the super (No longer required to deposit securities with the Receiver General)
- Must maintain adequate capital (adequate margin of assets in Canada over liability in Canada) and have appropriate forms of liquidity
The ICA outlines criteria for provincial companies. Briefly describe the criteria. Is it similar to the requirements for Foreign companies?
48 - McDonald
- Superintendent must approve every new provincially incorporated company that wishes to operate throughout Canada
- Provincial companies are treated similar to foreign companies (must appoint an actuary and auditor, maintain certain records, etc.)
- No required to deposit securities
- Must establish a conduct review committee to review related party transactions
How did the NAIC respond to the McCarran-Fergusson Act?
51 - Noonan
- Established a state-level statutory framework
- Provided for rate-filing provisions
- Prohibited “excessive, inadequate or unfairly discriminatory” rates
What are the 3 central themes of US insurance regulation?
51 - Noonan
o Regular financial reporting
o Safeguarding insurers’ solvency
o Ensuring fairness to consumers
Identify four enchroachments by the federal government into state insurance regulation
51 - Noonan
o 1973 – The Federal HMO Act creates of health maintenance organizations
o 1974 – The Employee Retirement Income Security Act (ERISA) established standards for employee-benefit plans with exemptions from state regulation
o 1979 – Minimum loss ratios for both individual and group Medicare supplement policies
o 1990 – Omnibus Budget Reconciliation Act delegated the NAIC to standardize Medicare supplement coverage
o Medicare+Choice program (later Medicare Advantage) joint federal/state effort in health insurance
o 1999 – Gramm-Leach-Bliley Act removed many restrictions of affiliations among financial services and set out minimum standards for state insurance regulation
What are two uses of credit scores
07 - AAA Credit Scores
- Determine whether an insured qualifies to be underwritten
- Segment risks into different rate groups - as risk classification factor or tier to which a risk is assigned
- Assignment to a residual market
What are the arguments for the use of credit scoring?
07 - AAA Credit Scores
• Strong correlation between credit scores and the expected costs associated with the risk - Appropriate for risk differentiaton
• Credit Scores allow better segmentation of risks into homogeneous groups (used to determine the relative rate between classes) - Removal will not lower premiums, only redistribute it
• If the actuary regularly analyzes overall aggregate rate levels and differentials, rates will be changed if more recent data suggesets it
o The potential price and differential shifts, along with motivations to be competitive, provide incentive for regular review
What are the concerns against using credit scoring? Provide counter-arguments for these concerns
07 - AAA Credit Scores
- Current economic crisis includes the severe tightening of credit markets - raises questions about the use of credit rating in insurance
- Impact on Aggregate Premium
• Concern that if the current economic crisis causes insurance scores to worsen, it will lead to unwarranted price increases
o Credit score is used to determine the relative rate relationship between classes, not to determine the overall premium need - Impact on Individual Premiums
• Concern that a dramatic shift in credit score could disrupt the relative rates among risks
o As trends develop, insurers adjust classification plans to reflect it
o The potential price and differential shifts, along with motivations to be competitive, provide incentive for regular review
What are the guidelines for the use of credit information in the context of quoting, UW and rating?
39 - IBC Code of Conduct
- Comply with Provincial Laws
- Ensure Credit Information is Current and Accurate
- Gather Prior Consent to Collect & Use Credit Information
- Keeping Customers’ Credit Info Confidential & Private
- Use of Credit as a Sole Variable
- Legitimate Uses of Credit Info – Pricing, U/W or Financing – Modelling
- Handling of Consumer Disputes
- Taking Adverse Action as a Result of Credit Information
- Refusal of Consent
- Extraordinary Life Circumstances
When the insurer is gathering consent to collect and use credit information, the insurer must ensure the following
39 - IBC Code of Conduct
a. Consent must be informed
i. Must not feel obliged
ii. Must understand the nature and scope of the request
iii. Consent must be specific and not presumed
b. No one can give consent for another
c. Consent retention - insurer must maintain proof of consent
d. Duration of consent - valid for as long as the policyholder has a continuous business relationship with the insurer
What does IBC say about “Keeping Customers’ Credit Info Confidential & Private”?
39 - IBC Code of Conduct
a. The only people who should have access to the information are those who require it
b. Comply fully with consumer and privacy protection laws (e.g. PIPEDA)
What does IBC say about “Use of Credit as a Sole Variable”?
39 - IBC Code of Conduct
• Can’t refuse to quote or base renewal rates, or deny, cancel or non-renew a policy based solely on credit information without consideration of non-credit variables
What must insurers verify from credit model suppliers before using credit information?
39 - IBC Code of Conduct
• Insurers must verify from suppliers of credit info that the following are not used as a negative factor in any credit scoring models:
i. Inquiries by consumer for own credit info, inquiries relating to insurance
ii. Income, gender, address, ethnic group, religion, marital status, nationality
How should insurers handle consumer disputes regarding a customer’s credit information?
39 - IBC Code of Conduct
Handle complaints about the insurer’s use of credit in accordance with federal and provincial law
What does the IBC say about “Taking Adverse Action as a Result of Credit Information”?
39 - IBC Code of Conduct
a. Insurers must treat fairly consumers without credit information
i. Can’t deny coverage, cancel, or non-renew a policy solely on credit basis
ii. Must base underwriting and rating on relevant information which is available
b. Insurer must disclose to the consumer adverse action taken only as a result of credit information
What does IBC say about “Refusal of Consent”?
39 - IBC Code of Conduct
a. Insurer can’t refuse to quote, provide coverage, cancel, or non-renew
b. Must offer a competitive rate, but won’t qualify for credit discounts