Section G Reg. of Ins.: Porter: Ins. Reg. 2.3

Question 1

Describe background of Paul v. Virginia

Answer 1

Paul applied to become a licensed insurance agent in home state of VA for NY insurers. VA denied because insurers had not deposited required foreign insurer bond. Paul sold policies anyways and was arrested.

Question 2

Describe Supreme Court verdict for Paul v. Virginia

Answer 2

Insurance is a contract delivered locally, thus insurance contract not interstate commerce. States could continue to regulate own insurance market without violating Constitution.

Question 3

Briefly describe two schools of thought about insurance compacts

Answer 3

1. Compacts deter open and free competition
2. In public’s best interests if it prevented insolvencies

Question 4

Briefly describe the Sherman Act of 1890

Answer 4

Prohibits collusion in attempts to gain monopoly power

Question 5

List activities for which the SEUA received criminal indictments:

Answer 5

• Continuing agreement and concert of action to take control of 90% of the fire and allied lines market
• Fixing premium rates and agents’ 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

Question 6

Briefly describe why the indictments against SEUA were initially dismissed

Answer 6

Based on U.S. Supreme Court’s decision in Paul v. Virginia

Question 7

Two key questions considered by the court when making the decision on SEUA

Answer 7

1. Did Congress intend the Sherman act to prohibit insurer’s conduct of restraining or monopolizing business?
2. Do insurance transactions across state lines constitute “commerce among several states”, which will subject them to Congressional regulation?

Question 8

List some factors considered when determining whether insurance transactions across state lines constitutes “commerce among several states”

Answer 8

• Insurance is not a business that is distinct in each of the states, it is interconnected and interdependent 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

Question 9

Immediate effect of the SEUA decision

Answer 9

Federal legislation now applied to insurance
- The Sherman Act (1890): prohibits collusion in attempts to gain monopoly power
- The Clayton Act (1914): identified and made illegal practices that lessened competition or created monopoly power

Question 10

Describe two practices prohibited by the Clayton Act of 1914

Answer 10

• Price discrimination
• Tying: requiring purchase of one product to purchase another

Question 11

Briefly describe the Robinson-Patman Act (1936)

Answer 11

Amendment to Clayton Act
* Required price differences to be justified by reduced operating costs

Question 12

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

Answer 12

• 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

Question 13

Describe the McCarran-Ferguson Act of 1945

Answer 13

Returned regulation of insurance back to states, as it was “in the public interest”

Question 14

List the exceptions for which the McCarran-Ferguson Act will not apply

Answer 14

• If states are not regulating the activities
• Sherman Act continues to apply to the use of boycott, coercion, or intimidation
• If Congress passes a law that applies only to the insurance industry, it will supersede any state regulation

Question 15

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:

Answer 15

• Allow cooperation in setting rates
• Keep Congress from interfering

Question 16

Following the McCarran-Ferguson act, the NAIC approved two model rate regulation bills.

List two purposes:

Answer 16

• Ensure rates not excessive, unfairly discriminatory, and were adequate
• Allow cooperation in setting rates as long as it didn’t hinder competition

Question 17

List how the NAIC bills (introduced after McCarran-Ferguson) achieved their purposes

Answer 17

• Required prior approval of rates
• Explained how to file rates
• Described the role of rating organizations
• Recommended anti-rebating laws

Question 18

Describe the anti-rebating laws

Answer 18

Prohibits insurers from returning portions of premiums and producers from returning portions of commissions to persons who purchase insurance

Question 19

List some activities deemed to be unfair and deceptive by the NAIC Act relating to “unfair methods of competition”

Answer 19

• Misrepresentation and false advertising of policies
• False information and false advertising in general
• Defamation
• Boycott, coercion, and intimidation
• False financial statements
• Unfair discrimination
• Rebating

Question 20

Upon what areas is regulation focused on after McCarran-Ferguson

Answer 20

The following market failures and imperfections:

• Insurer insolvencies
• Unavailable and unaffordable insurance coverages
• Inequitable treatment of insurance consumers

Question 21

List some NAIC programs to address insurer insolvencies

(after McCarran)

Answer 21

• Guaranty Association Model Act of 1969
• 1971 NAIC implemented Early Warning Tests program (1977 IRIS)
• 1989 NAIC adopted accreditation program

Question 22

After McCarran, briefly describe three ways Regulators have addressed unavailable or unaffordable insurance coverages

Answer 22

• 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

Question 23

Briefly describe Surplus Lines insurance

Answer 23

Insurance coverages obtained from non-admitted insurers when protection is not available from admitted insurers.

Provide coverage for risks that are unique, require high limits, or have difficult underwriting characteristics

Question 24

List some common characteristics of Surplus Lines insurance

Answer 24

• 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 requirements
• Before placement can occur, risk must be declined by admitted market though a “diligent search” of state’s admitted insurance market

Question 25

What does the GLB Financial Services Modernization Act conclude about the issue of state Vs. federal regulation

Answer 25

Each segment of financial services business is regulated separately:
- states continue to have primary authority over insurance