Vaughan Economic Flashcards
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 & provide a national voice
List 3 problems with regulation:
- regulatory fallibility
- regulatory forbearance
- regulatory capture
Describe Regulatory Forbearance
Failure to take prompt & stringent action in the face of a potentially troubled firm
2 causes of Regulatory Forbearance:
- Chance the insurer will survive
2. Shutting down an insurer is difficult
4 reasons that it is difficult to shut down a troubled insurer:
- Insurer may be major player in market
- Insurer possibly politically connected
- Adverse impacts on regulator’s reputation
- May result in a dispute with company if regulator orders it to take corrective action
Describe Regulatory Capture
Tendency of regulators to side with an interest group
3 types of Checks and balances in US regulation:
- Duplication
- Peer Pressure
- Diversity of Perspective
List 2 responsibilities of NAIC’s Financial Analysis Division (FAD):
- Performs ongoing financial analysis of all nationally significant insurers
- 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 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:
- Insurers of the regulator’s state will require licenses in order to be able to do business in other states
- Other regulators can examine the insurers and take action
List 5 Requirements for system to benefit most from peer review process:
- Culture of free flowing info
- Willingness to challenge & be challenged
- Accreditation system ensures that supervisors sharing information
- 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 regulatory costs vs benefits
- Overregulation imposes unnecessary costs
* Insufficient regulation causes unnecessary harm to consumers & taxpayers
List 4 elements of building an effective system of regulation (that emphasizes coordination & cooperation):
- Regulators must have confidence in each other
- Free sharing of information among supervisors
- Ability for other countries to take action if they are dissatisfied with actions of another supervisor
- Must be credible mechanism to resolve situation where assets are insufficient to fund all of the claims
5 principles of nationwide regulation proposed by NAIC to help achieve uniformity & reciprocity
- There need to be uniform standards where appropriate, although local standards may apply where necessary
- States should have the responsibility for setting/ enforcing standards
- State regulators should have equal standing regarding the regulation of holding company structures
- Structure should provide mechanisms for collaboration & interaction with international & financial services regulators on matters that impact US insurance
- The system shouldn’t reduce state’s authority to impose taxes & fees