Vaughan Economic

Question 1

Explain why historically the major criticism of
insurance regulation has been the cost of dealing with
multiple states:

Answer 1

• Inefficient

- Single regulator would reduce cost, increase uniformity & provide a national voice

Question 2

List 3 problems with regulation:

Answer 2

1. regulatory fallibility
2. regulatory forbearance
3. regulatory capture

Question 3

Describe Regulatory Forbearance

Answer 3

Failure to take prompt & stringent action in the face of a
potentially troubled firm

Question 4

2 causes of Regulatory Forbearance:

Answer 4

1. Chance the insurer will survive

2. Shutting down an insurer is dicult

Question 5

4 reasons that it is difficult to shut down a troubled

insurer:

Answer 5

1. Insurer may be major player in market
2. Insurer possibly politically connected
3. Adverse impacts on regulator’s reputation
4. May result in a dispute with company if regulator orders it to take corrective action

Question 6

Describe Regulatory Capture

Answer 6

Tendency of regulators to side with an interest group

Question 7

3 types of Checks and balances in US regulation:

Answer 7

1. Duplication
2. Peer Pressure
3. Diversity of Perspective

Question 8

List 2 responsibilities of NAIC’s Financial Analysis

Division (FAD):

Answer 8

1. Performs ongoing nancial analysis of all nationally
   signicant insurers
2. Identies trends, benchmarks, identies troubled companies

Question 9

Briefly describe the purpose of NAIC’s Financial

Analysis Working Group (FAWG):

Answer 9

Collaborate to work on problems of potentially troubled

insurers

Question 10

List 2 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:

Answer 10

1. Insurers of the regulator’s state will require licenses in order to be able to do business in other states
2. Other regulators can examine the insurers and take action

Question 11

List 5 Requirements for system to benefit most from

peer review process:

Answer 11

1. Culture of free flowing info
2. Willingness to challenge & be challenged
3. Accreditation system ensures that supervisors sharing
   information
4. FAD helps ensure that potentially troubled insurers are
   identied
5. FAWG serves as a forum to challenge the domestic regulators

Question 12

Explain why there is a need to balance regulatory costs

vs benefits

Answer 12

• Overregulation imposes unnecessary costs

- Insucient regulation causes unnecessary harm to consumers & taxpayers

Question 13

List 4 elements of building an effective system of
regulation (that emphasizes coordination &
cooperation):

Answer 13

1. Regulators must have condence in each other
2. Free sharing of information among supervisors
3. Ability for other countries to take action if they are
   dissatisfied with actions of another supervisor
4. Must be credible mechanism to resolve situation where assets are insufficient to fund all of the claims

Question 14

5 principles of nationwide regulation proposed by NAIC

to help achieve uniformity & reciprocity

Answer 14

1. There need to be uniform standards where appropriate, although local standards may apply where necessary
2. States should have the responsibility for setting/ enforcing standards
3. State regulators should have equal standing regarding the regulation of holding company structures
4. Structure should provide mechanisms for collaboration & interaction with international & financial services regulators on matters that impact US insurance
5. The system shouldn’t reduce state’s authority to impose taxes & fees