Section G Porter: Insurance Regulation Flashcards
Describe background of Paul v. Virginia
Paul applied to become a licensed insurance agent in home state of Virginia for New York insurers. Virginia denied because insurers had not deposited required foreign insurer bond. Paul sold policies anyways and was arrested.
Describe Supreme Court verdict for Paul v. Virginia
Insurance is a contract delivered locally, thus insurance contract not interstate commerce. States could continue to regulate own insurance market without violating Constitution.
Briefly describe two schools of thought about insurance compacts
- Compacts deter open and free competition
- In public’s best interests if it prevented insolvencies
Briefly describe the Sherman Act of 1890
Prohibits collusion in attempts to gain monopoly power
List activities for which the SEUA received criminal indictments
- Continuing agreement and concert of action to take control of 90% of the fire and allied lines market
- Fixing premium rates and agent’s commissions
- Using Boycott and other forms of coercion and intimidation to force non-SEUA members to comply
- Withdrawing rights of agents to represent SEUA members if they also represented non-SEUA companies
- Threatening insurance consumers with boycott and loss of patronage if they didn’t purchase insurance from SEUA members
Briefly describe why the indictments against SEUA were initially dismissed
Based on U.S. Supreme Court’s decision in Paul v. Virginia
Two key questions considered by the court when making the decision on SEUA
- Did Congress intend the Sherman act to prohibit insurer’s conduct of restraining or monopolizing business?
- Do insurance transactions across state lines constitute “commerce among several states”, which will subject them to Congressional regulation?
List some factors considered when determining whether insurance transactions across state lines constitutes “commerce among several states”
- Insurance is not a business that is distinct in each of the states, it is interconnected in inter-dependent among the states.
- Only 18 out of more than 200 SEUA members were domiciled in 1 of the 6 SEUA states.
- Intangible products, such as electrical impulses of telegraph transmissions, were subject to congressional regulation.
- Other businesses make sales contracts in states where they do not have headquarters and these are subject to the Commerce Clause.
- Not a single business conducting business across state lines is beyond the regulatory powers of Congress. Insurer’s should not be an exception
Immediate effect of the SEUA decision
Federal legislation now applied to insurance
- The Sherman Act (1890): prohibits collusion and attempts to gain monopoly power
- The Clayton Act (1914): Identified and made illegal practices that lessened competition or created monopoly power
Describe two practices prohibited by the Clayton Act of 1914
- Price discrimination
- Tying: requiring purchase of one product to purchase another
Briefly describe the Robinson-Patman Act (1936)
Amendment to Clayton Act
• Required price differences to be justified by reduced operating costs
State Regulators and insurance industry believed some forms of cooperation necessary. As a result, a subcommittee on federal legislation was established. List some of its recommendations…
- Congress must be pressured to enact legislation under Commerce Clause which allows states to continue to regulate insurance
- Sherman Act and Clayton Act must be amended to allow cooperative arrangements to establish adequate rates and coverages
- FTC Act and Robinson-Patman Act must be amended to exclude insurance
Describe the McCarran-Ferguson Act of 1945
Returned regulation of insurance back to states as it was in the public interest
List the exceptions for which the McCarran-Ferguson Act will not apply
- If states are not regulating the activities
- Sherman Act continues to apply the use of boycott, coercion, or intimidation
- If Congress passes a law that applies only to the insurance industry, it will supersede any state regulation
Following the McCarran-Ferguson act, The NAIC and state legislators began developing and implementing various insurance laws. Briefly describe what these laws were designed to do…
- Allow cooperation in setting rates
* Keep Congress from interfering
Following the McCarran-Ferguson act, the NAIC approved two model rate regulation bills. List two purposes…
- Ensure rates not excessive, unfairly discriminatory and were adequate
- Allow cooperation in setting rates as long as it didn’t hinder competition
List how the NAIC bills (introduced after McCarran-Ferguson) achieved their purposes
- Required prior approval of rates
- Explained how to file rates
- Described the role of rating organizations
- Recommended anti-rebating laws
Describe the anti-rebating laws
Prohibits insurers from returning portions of premiums and producers from returning portions of commissions to persons who purchase insurance
With some activities deemed to be unfair and deceptive by the NAIC Act relating to unfair methods of competition
- Misrepresentation and false advertising of policies
- False information and false advertising in general
- Defamation
- Boycott, coercion, and intimidation
- False financial statements
- Unfair discrimination
- Rebating
Upon what areas is regulation focused on after McCarran-Ferguson
The following market failures and imperfections:
- Insurer insolvencies
- Unavailable and unaffordable insurance coverages
- Inequitable treatment of insurance consumers
List some NAIC programs after McCarran to address insurer insolvencies
- Guaranty Association Model Act of 1969
- 1971 NAIC implemented Early Warning Tests program (1977 IRIS)
- 1989 NAIC adopted accreditation program
After McCarran, briefly describe three ways Regulators have addressed unavailable or unaffordable insurance coverages
- to address availability, majority of states have formed FAIR plans
- another way to address availability is with laws governing captive insurance organizations
- buyers’ guides explaining standard policies and options can also help consumers find available and affordable choices
- 1968 National Flood Insurance Act addressed affordability
- 2002 TRIA provided transparent system of shared public and private compensation for insured losses resulting from terrorist acts
- 1981 Risk Retention Act to address affordability of commercial insurance
Briefly describe Surplus Lines insurance
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 characteristics
List some common characteristics of surplus lines insurance
- Permit only specially licensed producers to place surplus lines business
- Licensee must make placement with unauthorized/non-admitted insurers that meet specified financial and managerial
- Before placement can occur, risk must be declined by admitted market though a “diligent search” of states admitted insurance market
What does the GLB Financial Services Modernization Act conclude about the issue of state Vs. federal regulation
Each segment of financial services business is regulated separately; states continue to have primary authority over insurance
List some concerns created by GLB
- privacy of personal financial information
- ability of state regulation to serve an integrated and global financial services market adequately
- consumers desire or need for integrated financial services
List three circumstances in which state laws and regulations can be void under the US Constitution
- When a state law contradicts a federal law
- When the courts determine that a state law interferes with the purpose or results of a federal law although the state law does not expressly contradict the federal law
- When a state law imposes an improper burden on interstate commerce, even though a federal law does not exist
List the exceptions to the rule that states are given primary regulatory control over the “Business of Insurance” (where the federal government is involved)
- The Sherman Act prohibits boycott, coercion, and intimidation
- Federal antitrust laws apply to the extent that state laws do not regulate such activities
- Federal laws enacted specifically to regulate the “Business of Insurance” preempt any state laws that apply to the same activities addressed by the federal laws
Briefly describe the definition of the “Business of Insurance”
Any activity that has one or more of the following characteristics:
- Insurer spreads or underwrites the policyholder’s risk
- Insurer and the insured have a direct contractual agreement
- Activity is unique to entities within the insurance industry
List two cases in which the federal government does intervene in the “Business of Insurance”
- Risk Retention Act
* National Flood Insurance Act
House Energy and Commerce Committee identified three principal aides of Product Liability insurance price and availability crisis of the 1970’s.
- Questionable ratemaking and reserving practices of insurers
- Unsafe products
- Uncertainties in the tort and legislation system
Briefly describe a contract of adhesion
Contract drawn up by only one party, the insurer. Ambiguous language will be interpreted in favor of the insured.
Briefly describe the doctrine of reasonable expectations
Insurer’s reasonable expectation of coverage will be honored even if that involves reading the policy provisions in ways not intended by the insurer
List cases in which the federal government regulates the insurance industry
- Regulation of Securities (issued by insurers)
- Federal Taxation of Insurance Companies
- Employee Retirement Income Security Act of 1974
- OSHA
• Federal regulation concerning discrimination in
employment relationships
• Federal agencies affecting the insurance industry because they administer federal laws that apply to insurers
List other parties that have influence on insurance regulation
- Courts
- Insurance industry Trade Associations
- Insurance Advisory Organizations
- Insurance Companies
Briefly describe how the Courts impact insurance regulation
- Policy language
- Policy coverage
- Claims settlement
List some functions of Insurance Industry Trade Associations
- Prompt access to legislative developments
- Can use association personnel as their lobbying forum
- Participate on committees in drafting new legislation or influence changes to pending legislation
- Continually watch for new regulations promulgated by state insurance departments
List some functions of “Insurance Advisory Organizations”
- Primarily deal with filing rates or prospective loss costs and forms
- Develop rating systems
- Collect and tabulate statistics
- Research topics important to members and the industry
- Provide a forum for discussion of issues important to members
- Educate members, the industry, insurance regulator and the public about particular issues
- Monitor regulatory issues of concern to members
List some areas of major legislation that have been created due to consumer complaints
- Redlining prohibitions
- Unfair claims practices laws
- Unfair trade practices laws
- Compulsory insurance laws
- High-risk driver pools
- FAIR plans
- Windstorm and other catastrophe pools
- Tort reform
Law requires commissioner to submit an annual report to legislature which summarizes activities of department and status of insurance industry of state. State four requirements of this report.
- Statement of income and expenses of the insurance department
- Exhibit summarizing the financial status and business transactions of licensed insurers of state
- Listing of insurers closed for that business years
- Names of insurance companies in receivership or other official financial difficulty with brief explanation of status
- Recommendations by insurance commissioner about insurance laws and the department’s operations
List four sources of State Insurance Law
- Legislative Branch
- Executive Branch (DOI and Attorney General)
- Judicial Branch (State Court System)
- State Insurance Regulatory Systems
List four features of a typical State Insurance Regulatory System
- Licensing requirements
- Reporting and filing requirements
- Periodic examinations
- Power to impose sanctions
How do State Legislatures influence regulation
- Often directly control DOI budgets
* Pass the insurance laws that insurance commissioner must enforce
List some activities of the National Conference of Insurance Legislators (NCOIL)
- Educating legislators on insurance issues
- Helping communications between state legislators on insurance issues
- Improving insurance regulation
- Asserting legislators prerogative in making state insurance policy
- Speaking about Congressional initiatives that might affect state insurance regulation
List of Legislative Influence through Non-insurance Laws
- Banking
- Contracts
- Premiums (e.g. premium financing)
- Fraud
- Investments
- Lobbying
List the NAIC fundamental insurance regulatory objectives
- Protect the public interest
- Promote competitive markets
- Facilitate the fair and equitable treatment of insurance consumers
- Promote the reliability, solvency, and financial solidity of insurance institutions
- Support and improve state regulation of insurance
List some examples of ways that NAIC staff supports state insurance regulatory officials
- Supporting NAIC’s committees and task forces
- Maintain databases to help regulators track financial adequacy of insurers
- Scrutinizing alien E&S insurers seeking to do business in U.S.
- Supporting individual state insurance regulators in court cases by issuing “friend of the court” supportive briefs
- Valuing insurer’s securities
Three Advantages of Model Laws, Regulations and Guidelines
- Model laws help legislative bodies streamline their legislative development process
- NAIC model laws help guide state in adopting the same or similar insurance laws, regulations, and guidelines
- Insurers can benefit from legal uniformity among the states
Three reasons some model laws are changed or never adopted by states
- State may view as inappropriate or unnecessary due to coverage in other state laws
- Legislators might decide to modify a model law to meet their states’ particular needs or better match other laws
- Legislature considers many matters and may see NAIC model law as just another agenda item
What does the NAIC Review of a state seeking accreditation involve
- interviewing department personnel
- reviewing laws and regulations
- reviewing prior examination reports
- inspecting regulatory files for selected companies
- reviewing organizational and personnel policies
- gain understanding of document and communication flows
- discussing comments and findings from the review
- conducting closing conference with the state to discuss findings and prepare a report
List three standards of Financial Regulation that need to be met to be accredited
- laws and regulations used by the state must meet certain basic standards of NAIC models
- regulatory Methods of State must be acceptable
- department practices must be adequate
Purpose of insurance regulation
Assure that the future performance promise, to pay a claim, will be fulfilled as needed (protects the public interest)
Briefly describe four Types of Filing Laws
- Prior Approval: insurance rates and coverages must be approved by the state insurance department before they can be used in the state
- File and Use: insurer must file insurance rates or coverages with the state insurance department but can then use them immediately
- Use and File: insurer can use the rate or coverage it wants, provided the insurer files the rate or coverage within a specified period after it is put into use
- No File: insurer not required to make a filing of the rate or coverage
List some of the most common reasons for rate or coverage disapproval
- Not in the public interest
- Illegal
- Unfairly discriminatory
- Other- excessive, inadequate or not meeting minimum standards
Describe the basic purposes of financial examination
- Detect as early as possible those insurers in financial trouble and/or engaging in unlawful and improper activities
- Develop the information needed for timely and appropriate regulatory action
What is reviewed in the financial examination
Insurer’s statistical statements, accounting procedures, financial statements, financial controls, management practices, and investment procedures
Briefly describe a market conduct examination
Review of the ways in which insurers do business- advertising, soliciting, policy issuing, claims handling
Two reasons why only a few states have historically had fraud departments
- Restraints on budgets
* Lack if insurance fraud laws
How did the 1994 Omnibus Crime Control and Safe Streets Act address insurance fraud
- Made it illegal to defraud, loot, or plunder an insurer
* Established a multi-state approach to anti-fraud activity
Briefly describe a “Receiver”
Disinterested person/business appointed to receive, protect, and account for money or other property due
Briefly describe a “Receivership”
Type of bankruptcy an insurer enters into when a receiver is appointed to manage the insurer and its property
Briefly describe a “Rehabilitation”
Process of reorganizing an insurer’s financial affairs so it can continue to exist as a financial entity, with creditors satisfying their claims from its future earnings
Briefly describe a “Liquidation”
Bankruptcy proceeding in which a bankrupt organization does not have enough assets to pay all creditors and the creditors are prioritized and paid according to the types of their claims
List potential grounds for rehabilitation
- Liabilities exceed assets
- Insurance company refused to submit books, records, accounts or affairs to insurance department
- Insurer willfully violates its charter or any other state law
Two criteria that DOIs look at when insurers are seeking a license
- Location if books and records - usually seeks assurance the insurer will retain books and records in the state
- Principal office - many DOIs require insurer to maintain an office in the state
Two reasons that regulators would prefer that insurer maintain an office in the state
- Create jobs
* Give regulator easier access
What do regulators examine during an organizational exam of an insurer applying for a license
- verify minimum capitalization is on deposit at an approved financial institution
- verify that management team in place
- corporate records are in good order
- policy forms and rates have department approval
- gives employees chance to review with the examiners the various DOI expectations for reporting
Briefly describe a domestic insurer, foreign insurer, and alien insurer
- Domestic - incorporated in the state writing insurance business
- Foreign - licensed to operate in a state but incorporated in another state
- Alien - licensed in a U.S. state but incorporated in another country
Two advantages that foreign insurers have when applying for license
- if a strong performer with solid financial record, more likely to receive approval
- already gone through rigors of the domiciliary jurisdiction’s review
List some differences in the licensing application between a foreign and domestic insurer
Foreign also has to provide:
- Charter and bylaws - reviews to evaluate the terms of its operations as legal entity
- Annual Statements - reviews for previous 2-3 years
- Examination Report - most recent report of financial examination
- Financial Statements - SAP and sometimes GAAP
- Certificates of Compliance - evidence that in compliance with domiciliary state
- Holding Insurer Registration Statement - if applicant is member of an insurer holding system
List an additional requirement for a foreign insurer seeking to be licensed in state where an affiliate already writing
May require u/w guidelines to ensure parent insurer does not shift business back and forth between affiliated insurers
Some regulators require that the insurer be seasoned to obtain a license. List exceptions to this requirement.
- Insurer has substantial capital
- Owned by an insurer with length history
- Department is satisfied with the application for other reasons
What additional requirements does an alien insurer have when filing for a license
- Appointment of U.S. manager
- Provide a Trust agreement - contract in which one party transfers ownership of property to another party that will administer the property for a third party’s benefit
- Certificate of alien funds on deposit
Initial Primary purpose of rate regulation
Financial stability of the insurer
Briefly describe two purposes of rate regulation
- Insurer financial stability which results in consumer protection
- Pricing insurance so that it is fair, equitable, and affordable
Briefly explain the political theory of regulation
Regulatory attention can be the greatest for issues that attract substantial voter interest and are east for policy makers to understand
Provide 4 Statement of Principles of P&C Ratemaking
- A rate is an estimate of the expected value of future costs
- A rate provides for all costs associated with the transfer of risk
- A rate provides for the costs associated with an individual risk transfer
- A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer
Describe three ways in which the insurance product is unique
- Insurers set rates before the actual costs are known
- Regulatory environment different by state
- Insurance industry has many information-sharing and joint product development mechanisms
Describe the degree of rate regulation and rationale for ocean marine insurance
- Very little regulation
- Highly individualized risks
- No statistical info to justify rates
- Knowledge buyers and sellers
Describe the degree of rate regulation and rationale for surety
- Rate manuals filed, little regulatory review
- Less detailed stat plan and ratemaking data
- Fewer statistically based rating factors
- Subjective risk evaluation
- Less credible loss experience
Describe the degree of rate regulation and rationale for title insurance
- Rate manuals files, little regulatory review
- No stat plan or ratemaking data
- Few rating or risk evaluation factors
- Underwriting and exposure identification key to controlling losses
- Driven more by business expense than by insured losses
Describe the degree of rate regulation and rationale for commercial general liability
- General regulation, except during tight markets
* Sophisticated buyers
Describe the degree of rate regulation and rationale for private passenger auto
- Often regulatory review of overall rates and details of rating plan
- Legally required or socially desirable for consumers to purchase
- Uniformed consumers
- Highly uniform stat plan with credible rate data
- Complex rates and classification system
Describe the degree of rate regulation and rationale for workers compensation
- Close regulation, prior approval of rates and classification system
- Legally required of most employers
- Costly widespread business
- Complex rating and classification system
Difference between Statistical Agent and Rating Bureau
- Statistical Agents/ Advisory Organizations: collect and report loss experience
- Rating Bureaus: prepare rate filings and submit to regulators on behalf of members
Three levels of regulatory action to control financial difficulties
- Mandatory Corrective Action
- Administrative Supervision
- Recieverships, rehabilitation, and liquidation
List some questions raised by the fact that Guarantee funds shift liability to other insurers, policyholders, and taxpayers
- Does guaranty fund protection make consumers too unconcerned about selecting financially strong insurers?
- Do guaranty funds diminish the pressure on regulators to shut down weak insurers?
- How much of the cost for guaranty fund protection is shifted to policyholders and taxpayers?
- How effective is the record of state regulation?
List two benchmarks of regulatory performance
- Low insolvency rate
* Extent to which regulation increases expenses and restricts products
List some of the most frequent contributors to insurer insolvency
- Rapid premium growth
- Inadequate rates and reserves
- Unusual expenses, such as unexpected catastrophic losses
- Lax controls over managing general agents
- Reinsurance uncollectible
- Fraud
Which factor precedes nearly all of the major failures and why?
Rapid premium growth - reduces the margin for error in the operation of insurers; usually indication of bargain rates and lax u/w standards
Two steps of Regulatory Intervention Procedure following an insolvency
- Fact finding
* Implementation of regulatory action to control financial difficulties facing insurers
Briefly describe what happens during the Fact Finding stage
Regulators from several states examine the insurer
List some requirements of the insurer from the Mandatory Corrective Action
- Perform certain actions to reduce liabilities
- Limit its new or renewal business on products that are not guaranteed renewable
- Reduce it’s General and commission expenses by specified methods
- Increase it’s capital and surplus
- Suspended or limit dividend payments to stockholders/policyholders
- Limit or withdraw from specified investments
- File reports concerning the value of its assets
- Document the adequacy of its premium rates
Briefly describe the Administrative Supervision stage
Legal condition under which an insurer may be required to obtain the commissioner’s permission before:
- Selling or transferring assets or Inforce business or using as collateral
- Withdrawing, lending, or investing funds
- Incurring debt
- Accepting new premiums
- Renewing policies that are not guaranteed for renewal etc.
List some issues that regulators consider when determining when to take over supervision of the insurer
- How accurate are loss reserves?
- If assets were liquidated quickly to meet current creditor demands, what would proceeds be?
- Has management enacted measures that are stringent enough to stem the operating losses?
- Is the insurer’s reinsurance adequate and collectible?
Why is an insurer placed into receivership
Financial difficulties are so severe that more than supervision is needed
Briefly describe Receivership
Type of bankruptcy an insurer enters when commissioner becomes receiver
Formulates plan to distribute insurer’s assets to settle obligations to customers
Two possible outcomes for Receivership
- Rehabilitation
* Liquidation
Briefly describe Rehabilitation
Impaired insurer continues to exist after the Receivership. Use rehabilitation period to assess insurers financial situation by comparing its assets and liabilities.
List some possible complications during the rehabilitation stage
- How will loss reserves develop
- Can expenses be trimmed and how fast
- How far are rates from being actuarially adequate to meet costs
• Can rates be raised without destroying the company’s ability to market to its desired market segment
Briefly describe Liquidation
Bankruptcy proceeding in which bankrupt organization does not have enough assets to pay all creditors. Creditors are prioritized and paid according to the types of their claims.
Two options that a receiver has during a liquidation
- Transfer all of the insurer’s business including all liabilities and assets to other insurers
- Sells the insurer’s assets and terminates the insurer’s business
What choice do policyholders of a liquidation insurer usually have once the insurer is liquidated
- Continue coverage, subject to specified maximum amounts and be credited with a specified percentage of the account value with a new carrier
- Discontinue coverage and receive a specified smaller percentage of the account value in cash
Two tasks of the special deputy liquidator
- Freeze and quantify the insurer’s liabilities
* Marshal the assets and convert them to cash
List some activities that need to take place during the first few months of the liquidation
- Give notices of liquidation to creditors, policyholders and inform them of their right to file claims
- Cancel policy coverage
- Notify agents of their duties in the liquidation
- Identify, sell and collect assets
- Recover any improperly transferred assets
- Establish a procedure for receiving and adjudicating claims
- Make personnel decisions regarding the insurer’s staff and hire outside help
List the usual priority classes of asset distribution when they are liquidated
- Cost and expenses of administering the liquidation
- Partial payment of deaths to employees for services rendered within one year of the order for liquidation
- All claims for policy losses incurred
- Claims for unearned premiums and claims of general creditors
Knowing when to take over the supervision of the affairs of insurer requires financial and administrative judgement. State two key issues to consider.
- How accurate are loss reserves?
- If assets were liquidated quickly to meet creditor demands, what would proceeds be?
- Has management enacted tough enough measures to stem the operating losses?
- Is company’s reinsurance adequate and collectable?
What constitutes a credit-based insurance score?
- Rankings assigned to an insurance risk based on that risk’s underlying characteristics
- Common purpose to produce useful information in underwriting and pricing insurance
- Provides a relative measure of the expected cost of the risk
- Uses items found in a typical individual’s credit report, such as number of inquiries into opening new accounts and accounts 30 days or more past due
Describe how insurers use credit based insurance scores
- Some insurers use to determine whether to accept or reject a risk
- More commonly used to segment risks into homogenous groups for rating
- May be used directly as a rating factor (risk classification factor)
- May be used to assign risk to appropriate tier
Briefly describe why credit scores are a statistically reliable tool for segmenting risks with different expected costs
There is a strong correlation between insurance scores and expected costs associated with the risk
Briefly describe two ways in which credit scores can be used to segment risks into homogenous groups for rating
- May be used directly as a rating factor (risk classification factor)
- May be used to assign risk to the appropriate tier
According to Kucera, what is the effect of premiums of not using credit-based insurance scores?
It will not lower overall insurance premium, but redistribute charges
- Risks with lower expected costs will pay more than actuarially fair
- Risks with greater expected costs will pay less than is actuarially fair
What were the concerns about how the economic crisis would affect overall insurance costs and prices
Some regulators concerned that if insurance scores worsen, it will lead to unwarranted premium increases
Explain why a distributional shift is likely to have a smaller effect on renewal business
Some states/ companies only allow use of scores for renewals if it reduces insured’s premium
Argue for and against the use of credit- based insurance scores in personal lines insurance
Proponents
- Scores are predictive of an insured’s future claims experience
- Necessary tool for underwriting and/or rating
Critics
- Example of imposed discrimination against lower income individuals and protected classes of people
- Studies show use of scores disparately impacts certain classes of people
Two classes of people adversely impacted by the use of credit scores in insurance
- Lower income individuals
* Protected classes of people
List four weaknesses in the credit reporting system
- 2000 study by Consumer Reports showed 50% of credit reports contained errors
- Identify theft leads to invalid information on reports
- Excessive access to credit as evidence by the problems in the mortgage industry
- Credit reports disproportionately negatively affect certain parties
List come parties disproportionately negatively affected in the credit scoring process
- Recent divorces
- Recently naturalized citizens
- Elderly
- Disabled
- Those with certain religious convictions
- Younger individuals who have not established credit histories
Explain how a downturn in the economy could impact different segments of the population
It could potentially magnify differences in credit scores among vulnerable populations
According to empirical data, is there a relationship eternal the credit score and frequency of severity of claims:
Ni significant difference in magnitude of claims, only frequency: Consumers with lower credit scores file more claims
Provide a reason that the consumers with low credit scores file more claims:
Possible that frequency of insured loss events is the same across populations but that those with higher scores are less likely to file a claim
The Florida Legislature limited use of credit based scores in 2003 for PPA and HO. List the four legal challenges that insurers used to oppose these limits
- FL Office of Reg didn’t have the authority prevent use of credit scoring underwriting/ rating tool
- Office did not have authority to define term “unfairly discriminatory” as in statute
- Insurers didn’t have necessary data to demonstrate effect of credit scoring in protected classes
- Definition of “disproportionate impact” was too vague
How did the judge respond to the four legal challenges that insurers used to oppose the limits imposed by the Florida legislature?
Judge ruled against all but the last. He did agree that “disproportionate impact” needs to be defined more comprehensively
Define Telematics
The use of wireless devices to transmit data in real time back to an organization. The data recorded in telematics devices can be used to develop more accurate pricing, improve the granularity of risk management techniques and reduce losses by enabling better claims assessments
List come factors that could impact premium in UBI programs
- Location of vehicle
- Number of trips
- Milage
- Driver behavior (how well they drive)
Briefly describe the two categories of current loss cost models for telematics UBI products
- Based on total milage, time of day, and set of predefined events
- Based on more granular data about the vehicle use
List two advantages of UBI models that are based on more granular data
- The researcher can identify predictive variables more quickly, because once they identify one that could potentially be predictive, they should already have the data available to test their hypothesis
- The researcher can identify specific risky driving behaviors and convey this information to the driver, so that the driver may be coached to make corrections to improve their driving safety
List some Consumer benefits of telematics
- Possible lower premiums
- Ability to control premiums
- Enhanced safety and improved claims experience
- Households with young drivers will appreciate the focus on education and promoting safety
- Benefits due to the continuous connection of the telematics device (Faster emergency response time/ road side assistance/ stolen vehicle recovery/ fuel efficiency/ vehicle maintenance support)
List some reasons that premiums may reduce with respect to UBI
- Participation discounts
- Improved driving performance
- Voluntary reductions in milage driven
- Subsidy elimination
Insurer benefits of UBI/Telematics insurance include
- Reduced claim costs
- Better risk pricing
- Mitigate adverse selection and moral hazard
- Modify risky behavior
- Improved brand recognition, awareness and loyalty
- Difference their product offerings
- Create new revenue streams
Insurers that offer Telematics based UBI will have several competitive advantages
- They can identify the lowest risk drivers and increase the retention for this group
- They May gain more business as potential customers may be attracted by the potentially lower premiums
- Insurers are provided with new methods in which to communicate with policyholders
- Claims management will be enhanced
- Since the insurer can analyze the real time driving data, it can more accurately estimate accident damages and reduce fraud and claims disputes
- Programs will help for stolen vehicles to be tracked and recovered
- Early adopters will benefit from the rich driving behavior data that will be collected. Competitors who lack similar data will struggle fo price appropriately
List some benefits of UBI to society
- fewer accidents
- less congestion
- lower carbon omissions and dependence on fossil fuels
- rates that are more socially equitable (eliminate the cross subsidy between low mileage and higher mileage drivers)
Consumers have two main public policy goals for insurance
- Ensuring that all consumers have access to essential insurance products
- Insurance is the core method for loss reduction and risk mitigation
List some consumer concerns about the UBI programs
- privacy and the insurers ability to protect their personal data
- distribution of data by insurers for purpose other than loss mitigation and pricing
- reduced offerings of UBI programs to consumers in low and moderate income and minority communities
- failure to achieve material loss mitigation due to the blackbox approach
- use of telematics as just another data mining exercise that penalizes consumers because of where and when they drive which is heavily impacted by where they work and live
- Limited regulatory oversight to date
List some regulator concerns of UBI
- Storage and reporting of private data
* rating factors used to calculate the UBI premiums
Provide some recommendations for regulatory framework for Telematics programs
- establish data ownership and privacy standards
- establish standards for permitted and prohibited uses of consumer data
- collect and analyze granular data on offers and sales of UBI programs related to prohibited risk classification factors
- require that insurers include variables for race and income in GLMs
- create standards for disclosure of telematics and ratings programs, to ensure that consumers have the necessary feedback to alter their behavior
- replicate the analyses that are presented by insurers in summary form
- stop offering “discounts” unless the rating factor can be correlated with lower claims
List four types of telematics devices being used today
- Dongle
- Black box
- Embedded
- Smartphones
Briefly describe the dongle device
Self installed device that will be used for a period of time (often 6 months). This is the most popular option in the U.S.
Advantages of dongle
- relatively low cost
- high reliability
- can be installed by the driver
- re-usable
- can be transferred to another vehicle
- automatically turns on with the car’s ignition
- generates high quality and secure data on location and driving style
Disadvantages of dongle
- can only be used in modern vehicles
- vulnerable to fraud
- it will soon (12-18 months as of time of writing) will be technologically obsolete
Briefly describe the black box device
Professionally installed device, which is considered to be one of the most secure and reliable options. It can be used with both programs based solely on milage (PAYD) and programs that are based on both mileage and driving safety (PHYD)
Advantages of the black box device
Suited for first notice of loss (FNOL) because it is fixed in the car chassis and therefore can provide early notice of theft as well as valuable information for forensic crash reconstruction in the event of an accident
Disadvantages of black box device
- not portable
* most expensive (high installation and administration costs)
List advantages of embedded devices
- product differentiation
- improved customer relationship management
- potentially lower costs if there are product recalls
List disadvantages of embedded devices
- higher cost for the consumer (this option is often subscription based)
- not standardized
- potential issues with compatibility with insurance
- obsolescence (automobiles often have a long product cycle and so the technology is often outdated by the time the car is released)
List advantages of the Smartphone option
- they are usually equipped with relevant sensors, including GPS, accelerometers and gyroscopes
- they have large data storage capacity (infinite with the cloud) and superior communication capabilities
- there are no device, installation, nor data connectivity costs to the insurers (and no additional costs to consumers)
- the smartphones can do a large amount of the data processing, which will help reduce the data handling and storage costs
Describe why the smartphone option has not taken over the market
This may be due to limitations associated with the quality of data and reliability of measurement data that smartphones can provide: the accelerometer data is not calibrated and cellular gyroscopes need to be continually adjusted based on the phone’s changing position
Define “cost based” rate
Estimate of the future cost associated with individual risk transfer.
This is based on expected claims, claim handling expenses, underwriting expenses, policy acquisition expenses, reasonable profit, investment income and other risk transfer costs.
Define Rating Cell
Combination of rating variables from a rating plan
Define Risk Profile
Set of characteristics listed in the insurer’s rating plan required to calculate the premium. People with the same risk profile should have the same expected risk, loss and expenses.
Define Unfairly Discriminatory Rates
Unfair discrimination exists following the allowance of practical limitations, price differentials fail to reflect equitably the differences in expected losses and expenses
Define Price Optimization
The process of maximizing or minimizing a business metric using sophisticated tools and models to quantify business considerations
Examples of business metrics that are maximized via price optimization
Marketing goals, profitability and policyholder retention
Three types of optimization used in ratemaking
- Ratebook Optimization: cost and demand models are utilized to adjust the factors in an existing structure
- Individual Price Optimization: creates a price based on cost and demand models at the individual policy level
- Hybrid Optimization: create a new rate factor based on a demand model that supplements a cost based rating algorithm
Factors incorporated in Hybrid Optimization models
- expected retention
- profitability
- rate of change from the current premium to the proposed premium
- premium volume
- expense
Compares price optimization and the traditional ratemaking approach
‼️THIS IS A PICTURE I DONT KNOW HOW TO ENTER IT ON HERE MAYBE ONLINE‼️
Price optimization poses several challenges to regulators
💩 Because price optimization impacts the selections as opposed to the cost based indications, regulators may be challenged when reviewing the insurer’s rates, as it may not be clear how exactly optimization influenced the selections
💩 There is a large amount of information related to the price optimization process to consider
💩 Regulators must rely on the insurers to provide accurate and complete information on the rates, as well as the adjustments required to produce those rates
💩 Regulators currently do not have the necessary data for an independent evaluation of a large portion of the insurer’s modeling and calculations
List come criticisms against price optimization
🔹penalizes customers, as it involves insurers attempting to charge the highest possible price without causing the consumer to switch
🔹can result in unfairly discriminatory rates
🔹insurers may raise prices of those who are less likely to shop around, often low income and minority customers
List some ways in which different regulators have responded to price optimization
▪️Many states defined price optimization and prohibited the defined practice.
▪️Some state regulators believe that the existing state laws are sufficient to cover price optimization. No bulletin/ public announcement specific to optimization is necessary.
▪️Many states have not yet received a filing that mentioned that price optimization was used in the rating process.
List some options for potential regulatory responses to price optimized rating schemes that were recommended by the Price Optimization Task Force
▫️Determine which price optimization practices, if any, are allowed in the state
▫️ Define any constraints on the price optimization process and outcomes
▫️Develop regulatory guidance on statutory rate requirements, to ensure that the rates are not excessive, inadequate, or unfairly discriminatory
▫️ Enhance filing requirements
▫️ Require explanation/ reasoning to support any proposed rate that deviates from the actuarially indicated rate
▫️ Change the filing laws to require more transparency (after considering state laws on confidentiality)
List examples of constraints that regulators can apply to optimization
♟limit the price adjustment to be between the current rate and actuarially indicated rate and always move towards the actuarial indicated rate
♟require that the rating factors selected be between the current and actuarial indicated factors or within a confidence interval around the current/ indicated factors or directionally consistent with the current factors
♟limit the variables that can be used in defining a risk class
♟only allow price optimization to be applied to classes of at least a certain size
♟price optimization to be applied to classes of at least a certain size
Describe how filing rates can be enhanced to accommodate price optimization
🔹consider whether the actuarial indication is the point estimate or any selected value within the confidence interval around the point estimate
🔹consider whether to require actuarial certification that the indications in the rate filing are based exclusively on the cost considerations and are not otherwise adjusted
🔹consider requiring disclosure of any adjustments to rates that are not based on expected costs
🔹 consider disallowing non-cost based adjustments to selected rates or rating factors
List ways in which regulators can ensure that optimization is more transparent
▫️disclosure of whether price optimization is used
▫️disclosure of differences in proposed prices for the existing and new customers that have the same risk profile
▫️file a report to show the distribution of the expected loss ratios under both the current and proposed prices
▫️ disclosure of all date sources, models and risk classifications used by the insurer to calculate premium
▫️disclosure of which rating factors are impacted by the price optimization for all existing and new applications for insurance
▫️require a certification by an actuary that all non cost based considerations impacting the proposed rates and rating factors are documented in the filing
Recommended criteria in which a selected rate that is not between the current and indicated rate may be acceptable if:
🔹 it is closed
🔹 it complies with state law
🔹 it is demonstrated to be consistent with actuarial ratemaking principles and Standards of Practice
List examples of factors that regulators should prohibit be used in price optimization
▫️ price elasticity of demand
▫️propensity to shop for insurance
▫️retention adjustment (individual level)
▫️ propensity to ask questions or file complaints
List 3 recommendations of the Task Force for the states:
🔹 Consider issuing a bulletin to discuss insurer’s use of methods that may produce non cost based rates
🔹 Consider enhancing requirements for personal lines filings to increase disclosure and transparency around rates/rate indications/rate selections
🔹 Analyze models used by insurers in ratemaking to ensure that the model meets state law and confirms to actuarial principles
Reasons that the classification of insurers as SIFIs turned out to be quite controversial:
▫️Designation results in significant additional regulation
▫️ The business models between insurers and banks are very different
▫️ It has been acknowledged that insurers made minimal contribution to the crisis
▫️ The criteria to be classified as a SIFI is unclear: there have been no guidelines published that would allow insurers to get off or stay off the list
Insurers were likely included in the scope of Dodd Frank because the “Financial Products” division of the insurer AIG was heavily involved in the crisis.
List two reasons that this may have been inappropriate:
🔺 This banking division which was unrelated to AIGs insurance operations
🔺 When the crisis started, the Financial Products division was actually already under federal regulation by the Treasury’s Office of Thrift Supervision (OTS)
List some impacts of the Dodd Frank act:
🔸 Provide the Federal Reserve System (Fed) limited regulatory authority
🔸 Established the Federal Insurance Office (FIO) part of the US Treasury to monitor the insurance industry
🔸 Allows the Fed and FIO to influence/ be influenced by the International Association of Insurance Supervisors (IAIS)
Two types of insurers that the Fed is authorized to regulate
🟡 Systematically Important Financial Institutions (SIFIs): institutions that could cause a National systematic economic disruption if they fail
🟡 Insurance holding companies that own banks or thrifts
List some functions of the Federal Insurance Office
🔹 Aggregates insurance information from various sources
🔹 Monitors the insurance industry
🔹 Identifies insurance activities that could contribute to a financial systematic crisis
🔹 Develops federal policy about nationally or internationally important insurance issues
🔹 Consults state government on insurance matters
🔹 Monitors the availability and affordability of insurance
🔹 Work with the US trade Representative to negotiate covered agreements with foreign regulators
Requirements of insurers regulated by the Fed
🟣 Develop living wills (resolution plans) to be used if there is bankruptcy
🟣 Meet liquidity requirements
🟣 Undergo stress testing
🟣 Meet capital standards
List issues if the international standards do not reflect the current state based regulation:
There could be:
▫️Less product innovation
▫️Higher costs
▫️Few options for consumers
▫️ Insurers could be forced to consolidate, resulting in fewer insurance options and larger insurers that may become systematically important
List some of the most significant effects on P&C actuaries
🔸 Dual regulation: there could be regulations impacting accounting and solvency standards that could result in an inconsistent and non-level playing field
🔸 Dual regulation: due to the additional federal regulatory body, regulations would be overly restrictive and expensive to follow
🔸 Increase in capital requirements
🔸 Standardization requirements drive commoditization
🔸 Significant increase in compliance costs for insurers that own banks
Purpose of the NRRA
🟢 Limit the regulatory authority of surplus lines transactions to the Home State of the insured in order to create a more simplified and efficient surplus lines system
🟢 Establish federal standards for:
🔹 The collection of surplus lines Premium Taxes 🔹 Insurer eligibility 🔹 Commercial purchaser exemptions
Definition of home state of insured
🏡 State in which insured maintains its principal place of business
🗺 If 100% of the risk is located outside of the state mentioned above, the state to which the greatest percentage of the insureds taxable premium is allocated
How does NRRA
facilitate the allocation of premium taxes
🏘 NRRA allows the insureds home state to require surplus lines brokers (and insurers that have independently purchased insurance) to file annual tax allocation reports that allocate the premium to exposures in each state.
NRRA definition of a sophisticated commercial purchaser of non-admitted insurance
One that meets the following requirements at the time of placement:
🔹 Employs a qualified risk manager to negotiate insurance coverage
🔹 Has paid aggregate nationwide commercial P&C premiums in excess of $100k in the previous 12 months
Meets all of the following criteria:
🔻Net-worth exceeding $22.04M
🔻Generates annual revenues exceeding $55.1M
🔻Employs more than 100 full time/ full time
equivalent employees or is a member of an affiliated group employing more than 1,000 employees total
🔻Not-for-profit organization or public entity generating annual budgeted expenditures of at least $33.06M
🔻Municipality with population exceeding 50k people
Criteria by which brokers for Exempt Commercial Purchasers are not required to satisfy diligent search requirements
▫️Broker discloses to the insurance purchaser that insurance may be available in the admitted market that provides greater protection with more regulatory oversight
▫️Purchaser subsequently requests in writing that the broker place the coverage with a non-admitted insurer
Purpose of NAICs National insurer producer database
Provides details of the licensure of surplus lines brokers
Describe the National Association of Registered Agents and Brokers (NARAB)
A national clearinghouse which is a one stop licensing system for agents/brokers operating outside of their home state. NARAB is governed by a board of state insurance commissioners and industry representatives.
The purpose of NARAB is to apply licensing, continuing education and non-resident insurance producer standards on a multi-state basis, while preserving the laws of the individual states. If agents/brokers become members of the Association, they must meet strict standards and ethical requirements.
Purpose of export lists
Relieve the broker from first having to try to place the business with licensed carriers.
Which eligibility requirements can states impose on foreign surplus lines insurers
Standards that conform with the Model Act: nationwide uniform requirements, forms and procedures that are enacted based on an agreement among the states
Requirements of Model Act for foreign surplus lines insurers
🟡 Be authorized in its domiciliary state to write the type of insurance that it is looking to offer as surplus lines coverage
🔵 Have capital and surplus under the laws of its domiciliary jurisdiction that exceed the greater:
🔹Minimum capital and surplus requirement under the law of the home state of the insured
🔹$15M
Alternative method available (in addition to surplus lines) to access the non-admitted market
Direct placement/ independently procured placement
Describe a Direct placement/independently procured placement
The insured purchases the insurance directly from and unauthorized carrier either directly or via a broker/agent that is not licensed in the jurisdiction in which the risk is allocated
Direct placement is protected from state regulation of which circumstances apply
🟢 The insured does not access the non-admitted market via a resident agent/broker
🟢 There is no activity by the insurer in the state either in the making or performance of the contract
🟢 The transaction takes place solely (or principally for NY) outside of the state where the insured is located
Define a RRG
Structure that is set up by a group of companies (members) to provide insurance to the group
Briefly describe the GAO study findings of the RRG market
Though RRGs were generally successful, they would benefit from more consistent regulation by the states
What types of insurance can RRGs write
Various types of commercial liability insurance
List an advantage of RRGs over pure captives
RRGs May write directly in any state without obtaining a license
Four differences between the regulation of RRGs and traditional insurers
🟣 Many RRGs file their financial statements using GAAP accounting
🟣 Few RRGs (if any) are required to submit rate and form filings. Instead, rates are generally based on an actuarial analysis of the membership
🟣 RRGs are able to manuscript the policies to suit the needs of the members
🟣 The LRRA forbids the RRGs from participating in state guaranty funds
List three agencies that produce credit ratings
S&P, Moody’s & Fitch
List an agency that produces Financial Strength Ratings for life and P/C insurers
AM Best
List three reasons why Financial Strength Ratings are important to insurers
1️⃣ Assess ability to pay claims
2️⃣ Reinsurers desire investment grade ratings to retrain business
3️⃣ Independent agents use to place customers with higher rated insurers
Give two criticisms of the use of rating agencies
🔻 Recent downgrades of highly rated debt
🔻 Oligopolistic nature of rating agency industry
🔻 Greater efficiency of free markets in determining bond yields
Two reasons that unrated insurers can be at disadvantage
1️⃣ Independent agents may hesitate to use them
2️⃣ Banks require property insurance licensed insurer for mortgages
The Ratings Process focuses on quality of insurer’s managers and business strategy. List a few factors that it considers:
✨ Knowledge of industry trends
✨ Experience with adverse scenarios
✨ Handling of current problems
✨ Doesn’t cover underwriting or investment decisions, as both can be distorted by random fluctuations
Five steps of an interactive rating
1️⃣ Background research by ratings and proprietary data submitted by insurer
2️⃣ Interactive meetings between ratings analyst and senior managers of the insurer
3️⃣ Preparation of ratings proposal by lead analyst and additional data submitted by insurer
4️⃣ Decision by the ratings committee after lead analyst presents proposal
5️⃣ Rating published
Three reasons public data insufficient for the Rating Agency analysis:
1️⃣ Investment schedules have little detail on derivatives
2️⃣ Reserve schedules may not show the same segmentation that the insurer uses
3️⃣ Reinsurance data doesn’t show attachment points/limits
What types of data does the rating agency collect during the interactive meetings?
Underwriting, reserving, investment, and operating performance with supporting data
What happens if the insurer refuses an interactive meeting
Agency may issue a public rating using public information. Agency May issue public rating to inform others that past rating is no longer valid
Three reasons that an insurer with a rating from A.M. best May request another rating from S&P, Moody’s or Fitch
1️⃣ May want to issue debt through a holding company and wants rating from agency with more experience in debt ratings
2️⃣ Public company may want rating from agency better known to investors
3️⃣ May not like current rating and believes second will be better
Two broad categories of requests that agencies may make during the interactive meetings between ratings analysts and senior managers of the insurer:
1️⃣ High level requests
2️⃣ Insurer specific based on business written
List some examples of high level requests that the agencies may make during the interactive meetings
Business strategy, risk concentration guidelines, how information travels from management to employees
List some examples of the extensive background material that the agency requests from the insurer
🔸Statutory A.S. And GAAP financial statements
🔸History of company focusing on major events with biographies of senior executives
🔸Investment strategy and guidelines
🔸Organizational charts
🔸Product descriptions and business strategy by line
Three reasons that the insurer should not withhold damaging data that is not requested
1️⃣ Insurer loses credibility
2️⃣ Makes agency look bad to investors
3️⃣ May place insurer on ratings watch or lead to ratings downgrades
Briefly explain the top-down approach used by the Rating Agencies
✔️Start with economic and industry forecasts
✔️Go to insurer’s position within the industry
Two reasons that the agencies are reluctant to change ratings too quickly
1️⃣ Erroneous downgrades anger clients
2️⃣ Erroneous upgrades ruin agency’s reputation
Three reasons most insurers are rated
1️⃣ Agents are cautious of unrated insurers
2️⃣ Third-parties rely on outside assessments of insurer solvency
3️⃣ Rating agencies are efficient at assessing financial strength
List four lines of business where high ratings are important
1️⃣ Reinsurance
2️⃣ Surety
3️⃣ Homeowners
4️⃣ Structured settlements
Briefly explain why high ratings are important for reinsurance
💼 Many reinsurers are not licensed in the U.S.
💼 Often cover long-tailed, catastrophe, or other large claim risks
Primary insurers need financially strong reinsurers.
💼 Strongly capitalized reinsurers can charge higher premiums
💼 Reinsurance treaties may specifically link ratings and security
Briefly explain why high ratings are important for surety
Principles may require construction firms obtain surety contracts from A rated insurers
Briefly explain why high ratings are important for Homeowners
Banks require property insurance to issue mortgages. Due to risk of catastrophes in property, banks may require insurer has investment grade rating
Briefly explain why high ratings are important for Structured Settlements
To protect claimants, courts may require A rated insurers
List A.M. Best financial strength ratings
☑️ Secure
(Superior - A++, A+/Excellent - A, A-/ Good - B++, B+)
🛑 Vulnerable
(Fair - B, B-/ Marginal - C++, C+/ Weak - C, C-/ Poor - D/ Under Supervision - E/ In Liquidation- F/ Rating Suspended - S)
List the US Insurance Regulatory Mission
Protect the interests of the policyholder and those who rely on the insurance coverage provided to the policyholder first. While facilitating stability as well as reliability of insurance institutions for an efficient marketplace for insurance products .
What approach did regulators determine is the best way to achieve this Regulatory Mission
Combining Financial Regulation and Market Regulation
Three stages of Financial Regulation
1️⃣ Mitigate/eliminate risks via restrictions on insurer’s activities
2️⃣ Use financial tools and oversight to work with insurers to implement corrective actions
3️⃣ Provide a backstop of financial protection in the event of a receivership
List and briefly describe three types of receivership
🧰 Conservation = safeguard the insurer’s assets while the regulator determines the best course of action
🛠 Rehabilitation = a tool to fix the problems, protect assets, run off the liabilities or prepare for liquidation
🕵🏼♀️ Liquidation = identify the creditors and distribute the assets
Briefly define Market Regulation
Analysis/ oversight of insurer’s behavior in the market
What do regulators look at during Market Regulation
🤝 Treatment if policyholders/claimants in product development and pricing
👥 Competition
📊 Statistical reporting
🛒 Administrative residual markets
🧾 Licensing of insurance producers
📇 Consumer assistance and information services
List some factors that influence the optimum level of regulation
💸 Costs and benefits of regulation
🤝 Fair and equitable treatment of insurance consumers
💰💪🏼 Financial stability and reliability of insurance institutions
List some factors that we can consider when assessing the level of regulatory success
▫️Frequency and extent that the regulation helped by identifying and correcting the insurer’s problems before they caused harm to policyholders and claimants
▫️Frequency of insolvencies and payments to policyholders in those insolvencies
▫️Effective and efficient rehabilitation actions
▫️Market health
▫️Levels if competition
▫️Perceived and actual cost benefit of regulation
List three points to support the argument that the US regulatory system has been successful
💪🏼📋There is a strong track record of protecting consumers and overseeing solvency
💪🏼🇺🇸There is strong depth and breadth of the US insurance industry
🔘🗂Capacity if the insurance guaranty system
List the components of requisite authority
🗄Legal basis
📰Independence and accountability
🦸🏻♂️Adequate powers
💵Financial resources
👨👩👧👦Human resources
👩🏼⚖️Legal protection
🤫Confidentiality
How can regulators effectively regulate in a market as big as the US insurance market
Regulators need to adopt a risk focused approach, where they focus on the greatest risk that insurers are exposed to.
List two unique features of US insurance regulation
1️⃣ Extensive system of peer review, communication and collaborative effort: commissioners can question the actions of another DOI and pressure that DOI to act
2️⃣ Diversity of perspective results in centrist solutions: Overregulation harms consumers, whereas under regulation harms consumers and taxpayers
Seven core principles of the US insurance financial solvency framework
1️⃣ Regulatory reporting, disclosure and transparency
2️⃣ Off site monitoring and analysis
3️⃣ On site risk focused examinations
4️⃣ Reserves, capital adequacy and solvency
5️⃣ Regulatory control of significant, broad based risk related transactions
6️⃣ Preventive and corrective measures including enforcement
7️⃣ Exiting the market and receivership
Briefly describe Principle 1 (regulatory reporting, disclosure and transparency)
Insurers regularly provide standardize financial reports to regulators to help assess risk and financial condition
List some qualitative disclosures contained in the reports provided to regulators
❓Interrogatories
📝 Notes to the financial statements
🗣 Management’s discussion and analysis
🔵 SAO
🧾 Annual audit option (from the CPA)
Why are insurers subject to market discipline
Insurance reporting is very transparent: consumers can access the annual and quarterly statements. The market discipline will arise from analysis by the industry, financial markets and public.
Main purpose of off site solvency monitoring
Assess the financial condition of the insurer on an on going basis and also to identify and assess current prospective risks
What type of information do regulators use in the off site monitoring (in addition to the regulatory financial reports and financial tools)
📁CPA audit reports 📃Results if the most recent on site regulatory financial exam 🗂SEC filings 📂Corporate reports 🧾Financial statements of controlling companies 📊Market conduct report 🗃Rate and forms filings 🤦🏼♀️Consumer complaints 📁Independent rating agency reports 🗣Correspondence from agents and insurers
List some items that are elevated during the on-site exams
💪🏼Financial strength
👨🏻💻Management oversight
📜Corporate governance
⚖️Risk identification and mitigation
In what cases can the regulators perform exams more often than every five years
The regulators may perform more frequent exams of insurers who are subject to a higher level of financial risk. These more frequent exams may focus only on a specific risk.
Two purposes of the on-site exams
1️⃣ Evaluate the solvency of the insurers, based on the view of the strengths and weaknesses
2️⃣ Develop a prospective view of the insurer’s risks and risk management practices
What type of information is included in the public exam report
👨🏻💻 Assessment of financial condition
📃 Details about any of the material adverse findings from the exam
📑 May include required corrective actions, improvements, recommendations
Two reasons that the insurer needs to hold surplus in addition to reserves
1️⃣ The resources can cover the policyholder obligations in most future economic scenarios
2️⃣ There are sufficient resources for the regulator to be able to suggest or take corrective action in the case that an adverse trend is detected
List some transactions or activities that affect the policyholders’ interests that require regulatory approval:
📃 Licensing requirements
👨🏻💼 Change in control
💳 Dividends
🤝 Transactions with affiliates
📇 Reinsurance
Purpose of the preventive/corrective measures that regulators can take, based on the risks identified during the on-site and offsite regulatory monitoring
Correct problems to prevent insolvencies
List some preventative/corrective measures that regulators can take, based in the risks identified during the on-site and offsite regulatory monitoring:
📑 Requiring the insurer to provide and updated business plan
🗂 Requiring the insurer to file interim financial reports
🚫📉 Prohibiting the insurer from certain investments or investment practices
⛔️ Restricting or suspending a business that can be written or renewed
💸 Ordering an increase to the capital and surplus
📜 Ordering an insurer to correct corporate governance practice deficiencies
👥 Requiring replacement of senior management
⚖️ Seeking a court order to place the insurer under conservatism, rehabilitation, liquidation
Two reasons that receivership laws exist
1️⃣ Prevent insolvencies
2️⃣ Minimize losses and protect policyholders before/during an insolvency
List four alternatives to the insolvency that regulators will consider
1️⃣ Mergers or acquisitions
2️⃣ Reinsurance arrangements
3️⃣ Non-renewal of part or all the business
4️⃣ Placing the insurer into run-off mode
The US financial regulatory system consists of a three stage process. List the three stages:
1️⃣ Regulators limit/eliminate risks via restrictions and prior approval requirements
2️⃣ Financial oversight
3️⃣ Regulatory backstops and safeguards (guaranty funds and RBC)
Why did regulators begin to oversee and restrict insurer investments
In the 90s, several insolvencies were caused by high risk investments. To help reduce insolvencies, regulators began to oversee and restrict insurer investments.
Compare the “defined limits approach” to the “define standards approach”
📊 Defined Limits: limits the amount that can be invested in different assets
💸 Defined Standards: insurers need to follow a “prudent person” approach, where they are given more flexibility as long as they follow a sound investment plan
What is the most common cause for regulator intervention in the operation of the insurer
Hazardous financial condition
☣️💰
List some factors that may lead a regulator to believe that a company is in a hazardous financial condition
☣️ Findings determined to be hazardous to policyholders, creditors or general public
🤥 Failure to provide accurate information
🤡😈👨🏻💼 Finding incompetent unfit management
⌛️Insolvency of the insurer’s reinsurer or with the insurer’s holding company system
🕵🏼 Adverse findings in financial analysis or exams, audit, actuarial opinion, cash flow and liquidity analysis
Three goals of assessing the financial condition of an insurer
🧐 Identify potential adverse financial indicators as quickly as possible
🕵🏻♂️ Evaluate and understand the problems more efficiently
👷🏻♂️Develop corrective plans sooner, in order to decrease the frequency and severity of insolvencies
Three components of the risk focused surveillance by regulators
👨🏻💻 Financial analysis
👩🏼⚕️Financial examination
👨🏽🔧 Supervisory plan development
List four priorities of SMI
📄Create a document that articulated the US insurance regulatory system
🧐 Examine international developments for potential use in the US
📋 Comply with International Association of Insurance Supervisors (IAIS) and InsuranceCore Principles (ICP)
🌎 Apply lessons from the global financial crisis
What does the federal Non-admitted and Reinsurance Reform Act (NRRA) prohibit:
Prohibits a state from denying credit for reinsurance, if the domiciliary state:
▫️Has recognized credit for reinsurance
▫️Is an NAIC accredited state
List another rule listed in NRRA
Assigns the domiciliary state the sole responsibility for regulating the reinsurer’s financial solvency.
List some criteria that reinsurers need to meet to be eligible for/ maintain certification
💪🏼 Financial strength
⏰ Timely claims payment history
🧾 Requirement that insurer is domiciled and licensed in a “qualified jurisdiction”
Explain why historically the major criticism of insurance regulation has been the cost of dealing with multiple states:
🔻 Inefficient
🔻 Single regulator would reduce cost, increase uniformity and provide a National voice
List three problems with regulation
1️⃣ Regulatory fallibility
2️⃣ Regulatory forbearance
3️⃣ Regulatory capture
Describe regulatory forbearance
Failure to take prompt and stringent action in the face of a potentially troubled firm
Two causes of regulatory forbearance
1️⃣ Chance the insurer will survive
2️⃣ Shutting down an insurer is difficult
Four reasons that it is difficult to shut down a troubled insurer
🛒Insurer may be a major player in market
🇺🇸Insurer possibly politically connected
🚓Adverse impacts on regulator’s reputation
🗣May result in a dispute with company of regulator orders it to take corrective action
Describe regulatory capture
Tendency of regulators to side with an interest group
Three types of checks and balances in US regulation
👯 Duplication
🍻 Peer Pressure
👁 Diversity of Perspective
List two responsibilities of NAIC’s Financial Analysis Division (FAD)
1️⃣ Performs ongoing financial analysis of all nationally significant insurers
2️⃣ Identifies trends, benchmarks, identifies troubled companies
Briefly describe the purpose of NAIC’s Financial Analysis Working Group (FAWG)
Collaborate to work on problems of potentially troubled insurers
List two elements of the structure of the US regulatory system that allows other states to question a state, encourage improvement, and possibly pressure a domestic regulator to act
1️⃣ Insurers of the regulator’s state will require licenses in order to be able to do business in other states
2️⃣ Other regulators can examine the insurers and take action
List five requirements for system to benefit most from peer review process
1️⃣Culture of free flowing info
🧗🏼♀️Willingness to challenge and be challenged
📨Accreditation system ensures that supervisors sharing information (wording was weird on this one)
🔎FAD helps ensure that potentially troubled insurers are identified
📥FAWG serves as a forum to challenge the domestic regulators
Explain why there is a need to balance regulate cost vs benefits
💸Overregulation imposes unnecessary costs
🚫Insufficient regulation causes unnecessary harm to consumers and taxpayers
List four elements of building an effective system of regulation (that emphasizes coordination and cooperation)
1️⃣ Regulators must have confidence in each other
2️⃣ Free sharing of information among supervisors
3️⃣ Ability for other countries to take action if they are dissatisfied with actions of another supervisor
4️⃣ Must be credible mechanism to resolve situation where assets are insufficient to fund all of the claims
Five principles of nationwide regulation by NAIC to help achieve uniformity and reciprocity
✔️There needs to be uniform standards where appropriate although local standards may apply where necessary
✔️States should have the responsibility for setting and enforcing standards
✔️State regulators should have equal standing regarding the regulation of holding company structures
✔️Structure should provide mechanisms for collaboration and interaction with international and financial services regulators on matters that impact US insurance 🇺🇸
✔️The system shouldn’t reduce state’s authority to impose taxes and fees
