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Exam 6 > Tier 3 > Flashcards

Tier 3 Flashcards

1
Q

What restrictions might insurers place on a high risk driver?

A

Higher deductibles
Lower limits
Exclusion of coverages
Higher premiums

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2
Q

What are the 3 mechanisms for a state residual auto insurance market?

A
  1. Assigned Risk Plan (ARP)
  2. Joint Underwriting Association (JUA)
  3. Reinsurance Facility (RF)
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3
Q

How does an assigned risk plan work?

A
  1. Driver gets rejected by voluntary market
  2. Driver applies to ARP
  3. Driver is assigned to an insurer based on market share

A. Regulator sets rates
B. Insurer services policy
C. Insurer retains profits/losses
D. Insured are aware that they are in an ARP

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4
Q

What would cause a driver to not be eligible for an ARP?

A

A. No valid license
B. Felony in past 3 years
C. Habitual violation of laws

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5
Q

What are the differences between an ARP and JUA/RF?

A

In an ARP, the driver knows that they’re in the ARP and the insurer retains all losses and premiums.

In a JUA/RF, the driver doesn’t know they’re in it and the premiums/losses/expenses are shared among insurers.

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6
Q

What are the differences between a JUA and RF?

A

JUAs have a servicing carrier while a RF is serviced by the insurer
JUAs have uniform rates, while a RF might not

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7
Q

How does a joint underwriting association work?

A
  1. Driver applies to insurer in voluntary market
  2. Insurer either keeps the policy or the insurer/agent/broken forwards to JUA
  3. Rates are set uniformly in the JUA and a servicing carrier services the policy
  4. Insurers share profits/losses/expenses by market share
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8
Q

How does a reinsurance facility work?

A
  1. Driver applies to insurer in voluntary market
  2. Insurer either keeps policy or forwards to RF
  3. RF determines rates (operates as non profit) and insurer services claims
  4. Insurers share profits/losses/expenses by market share
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9
Q

What is a FAIR plan?

A

Fair Access to Insurance Requirements

Created for risks that are uninsurable but require insurance. For example:
- Properties in areas susceptible to riots
- Individuals with high number of prior claims

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10
Q

How do FAIR plans work?

A
  1. Coverage was denied by private market and property is not vacant or damaged and is up to code
  2. Policies are serviced by a syndicate or private company
  3. Premiums and losses are shared by all property insurers in the state
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11
Q

Why does the government get involved in insurance? (FCCES)

A

F - Filling needs unmet by private market
C - Compulsory (ex. WC)
C - Convenience (gov may already have structures in place)
E - Efficiency (no agent commissions)
S - Social purposes (private market is motivated by profit)

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12
Q

What are the different levels of government involvement?

A
  1. Sole provider (social security & unemployment)
  2. Partnership (NFIP)
  3. Competition (WC)
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13
Q

How is the effectiveness of government programs determined? (W/I - SEAN)

A

Is the program WELFARE or INSURANCE?
Does it achieve SOCIAL purposes?
Is it EFFICIENT?
Is it ACCEPTED by the public?
Is it NECESSARY?

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14
Q

Is crop insurance mandatory?

A

No, but declining it makes farmers ineligible for government disaster relief.

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15
Q

What crop insurance coverages are offered?

A
  1. Low yield
  2. Low price
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16
Q

How does crop insurance work?

A

Agents will market, write, and service crop policies, but the government will set rates and provide reinsurance. This is a PARTNERSHIP arrangement with the government.

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17
Q

What are the advantages & shortcomings of crop insurance? How can the shortcomings be mitigated?

A

Benefit:
- It provides stability to an important sector of the economy
Shortcomings:
- Encourages over-production
- Encourages farming in risky areas
- Losses are subsidized with taxpayer funds while private insurers profit
Mitigation:
- Limit coverage and shift more of the loss-sharing to private insurers

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18
Q

What are the 3 federal workers comp programs?

A
  1. Federal Employees Compensation Act (FECA)
  2. Longshore & Harbor
  3. Black Lung Benefit Act (BLBA)
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19
Q

What are some advantages of state funds?

A
  1. Lower costs (no advertising or commissions)
  2. Coverage for high risk customers
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20
Q

What are some disadvantages of state funds?

A
  1. Private markets are more innovative
  2. Private markets can operate efficiently (about 50% of states don’t have state funds
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21
Q

How do workers comp and medicare interact?

A

If the person is injured on the job and eligible for medicare, the workers comp policy will pay first. If they are not yet eligible but soon to be, then an MSA (medicare setaside allowance) will be created if treatment is expected to continue to when they are eligible for medicare.

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22
Q

Reasoning for the Medicare & Medicaid SCHIP Extension Act (MMSEA)? What did it do?

A

Reasoning:
- WC insurers would shift costs to medicare when the employee became eligible and wouldn’t say that it was a WC claim.
- MSAs were created to pay for future costs, but there was no incentive for private insurers to comply

Result
- CMS (Center for Medicare and Medicaid Services) has to review and approve MSAs otherwise they can deny claims. This scared private insurers into complying with MSAs.
- Increase in admin expenses

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23
Q

Windstorm plan eligibility

A
  1. Must be a coastal property
  2. Can’t be vacant
  3. Can’t be in disrepair
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24
Q

Social Security eligibility

A

Disabled since childhood or must have working credits

25
Q

Medicare/Medicaid eligibility

A

Age 65+

26
Q

NFIP eligibility

A

Mandatory if there is a federally-backed mortgage and the property is in a flood plain
Mandatory when required by lenders

27
Q

FAIR Plan eligibility

A
  1. Not vacant
  2. Up to code
28
Q

Policy goals of NFIP (AM&R)

A

A - Access
M&R - Mitigate and Reduce through floodplain management standards

29
Q

Objectives of NFIP (RASH)

A

R - Risk-Based premiums
A - Affordability
S - Sustainability
H - High participation rates

30
Q

How is the NFIP different from private insurance?

A
  1. It provides coverage to high-risk customers
  2. Distributes flood maps
  3. Requires building standards for participation
  4. Reduces need for disaster relief
  5. Funds rebuilding
  6. Protects lenders
31
Q

Exceptions to NFIP risk-based pricing

A
  1. Properties built/renewed prior to risk maps
  2. Newly mapped properties
  3. Properties that were originally up to code which are now mapped in higher risk areas
32
Q

How are private insurers involved in flood insurance?

A
  1. They can service policies for FEMA
  2. They can provide primary insurance
  3. They can provide reinsurance
  4. They can share risk with FEMA
33
Q

What are the servicing arrangements for private insurers working in the NFIP framework?

A

Direct Servicing Agent (DSA)
- Facilitates purchase of insurance directly from NFIP
- Private contractor for FEMA
Write-Your-Own (WYO)
- Private companies can write and service
- This is the majority of NFIP policies

THE NFIP RETAINS THE RISK FOR BOTH
Policies are the same for both

34
Q

What risk management tools does the NFIP leverage?

A
  1. Private reinsurance
  2. Capital markets (ex. CAT bonds)
35
Q

What is a tax basis income and how does it differ from SAP income?

A

It’s a statutory or SAP income with 2 adj.:
1. Earned premium is adjusted with a revenue offset
2. Losses (or reserves) are discounted

36
Q

Describe the IRS’s revenue offset procedure and why it’s done

A

Why: Acquision costs are not deferred, so insurers would report a loss and then later get a refund
How: A 20% discount is applied to unearned premium for simplicity

37
Q

Tax Basis Income Calculation

A

TBI = Tax-basis EP + InvInc - Tax-basis IncLoss

38
Q

Tax Basis EP Calculation

A

TBEP = EP + 20% * chg(UEP) = WP - 80% * chg(UEP)

39
Q

Tax Basis Inc. Loss Calculation

A

TBIL = Paid Loss + chg(disc loss) = Inc Loss - chg(discount amount)

40
Q

Purpose of Base Erosion & Anti-Abuse (BEAT)

A
  1. It prevents companies from shift profits out of the US
    2.
41
Q

How does BEAT work?

A
  1. Companies calculate their regular tax
  2. Companies calculate their alternative tax
  3. BEAT = Max(0, alternative - regular)
42
Q

aWhen does BEAT tax apply?

A

Insurer is a US group of companies with avg gross receipts over last 3 years of >500M and makes base erosion payments of >3% of total deductions.

Payments to a company that pays US taxes doesn’t count.

43
Q

Location of 3 components for discounting loss reserves

A

Undiscounted reserves: Schedule P Part 1
Discount Rate: Corporate bond yield for AY
Payout Patterns: Schedule P Part 1 (industry)

44
Q

McCarran-Ferguson Act

A

Preserves states the authority to regulate insurance, but federal law can still supercede. This followed the U.S. vs SEUA case.

Federal laws specific to insurance still supersede.
Insurance is exempt from most federal laws.

45
Q

1969: Paul V Virginia

A

Facts: Paul sold NY insurance policies in Virginia without a license to do so, and was fined and jailed.

Main Question: Did the state have the authority to stop Paul from selling these policies?

Outcome: Insurance is not an interstate commerce and can be regulated by the state

46
Q

Sherman Anti-Trust Act

A

The original anti-trust legislation but was too vague and only applies to interstate commerce. Goal was to prevent anti-competitive behavior.

47
Q

Clayton Anti-Trust Act

A

Prohibits acts that act as monopoly behavior

(T) Tying is not allowed (must buy auto to buy home)
(E) Exclusive dealings
(M) Market manipulation
(P) Price discrimination
(O) One person can’t be a director at multiple competing companies

48
Q

Robinson-Patman Act

A

Amendment to Clayton ATA

Price discrimination must be based on operating cost differences

49
Q

U.S. vs. SEUA

A

Facts: SEUA monopolized the market and fixed rates

Big question: Can the federal government regulate them?

Outcome:
District court - No
Supreme Court - Yes, insurance is interstate commerce since other intangibles such as electricity are interstate

50
Q

Gramm-Leach-Bliley Act

A

Removed barriers between banking, insurance, and securities exchange

Must disclosure sharing of information
National banks can’t have subsidiaries selling insurance
Claims can’t be paid with bank funds
States can’t block banks from selling insurance
Insurance can be sold in more than 1 state by one producer

51
Q

Describe surplus lines

A

A surplus lines broker places insurance with non-admitted carrier

Exempt from filing rates and guaranty funds

52
Q

How are surplus lines regulated?

A
  1. Product can’t be available in traditional market
  2. Producers must be licensed
  3. Business must be placed with insurers that meet managerial and financial requirements
53
Q

How is regulatory success tested? (PIED)

A

Protects
(P) policyholders
(I) Investors
(E) Economy
(D) Depositors

54
Q

Why does regulation fail? (FFC)

A

(F) Forbearance - Regulators fail to act in time
(F) Fallibility - Regulators are people and people make mistakes
(C) Capture - Regulator assumes the mind of an interest group

55
Q

What is the structure of insurance regulation? (M(PD)^2)

A

(M) Market discipline - Makes it hard for states to access federal funding which incentivizes stronger regulation
(P) Peer Pressure - Any state can take action against an insurer operating in their state. This can prompt other states to do so as well.
(P) Peer Review -
(D) Duplication - Having multiple regulators can help with identifying issues.
(D) Diverse perspective - Different regulators have different perspectives relating to regulation

56
Q

Identify 4 elements in building an effective global insurance regulatory system (TSAR)

A

(T) - Trust: Accomplished through NAIC regulation in the US
(S) - Share: Regulators in different countries must share information
(A) - Action: Other countries must be able to take action against an insurer
(R) - Resolution: There needs to be a mechanism for resolving bankruptcies

57
Q

What areas have regulators targeted for improvements in the US?

A
  1. rating agencies: review reliance on rating agencies in the RBC system
  2. securities lending: new reporting requirements for securities lending
  3. unregulated affiliates: impact on insurers
58
Q

Identify the NAIC’s 5 principles that any national regulatory structure should possess (STarCH)

A

(S) Standards: uniform where appropriate; set & enforce at state level
(T) Taxes and fees: States should be able to collect taxes and fees
(C) Collaboration: Encourage collaboration with international bodies
(H) Holding companies: State regulators should have equal standing with other regulators regarding holding companies

Exam 6 (8 decks)

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