RMI 3502 Topic 5 - Insurance Regulation

The Gramm-Leach-Billey Act requires financial institutions (companies that offer consumers financial products or services such as loans, financial or investment advice, or insurance) to (3 things)...

Explain their information-sharing practices to their customers, safeguard sensitive data, and have a uniform agent licensing/reciprocity.

(2nd reason for regulation) What are the several reasons that insurance regulators try to maintain a sound financial condition of private insurance?

(1) Insurance provides future protection; (2) Regulation is needed to protect public interest (insolvency causes adverse selection); (3) Insurers have a responsibility to insureds (gov safeguard funds); (4) Insurers have become insolvent despite regulatory reviews (goal is minimize, not eliminate, insolvencies).

(3rd reason for regulation) When insurance rate levels are inadequate (too high) what two things may result?

(1) Some may become insolvent, others may withdraw or stop writing new business; (2) May cause an insurance shortage and individuals/firms might be unable to obtain the coverage they need.

One of the types of exposures in the US Surplus Lines Market is high-capacity risks. What characterizes these?

Exposures needing very high limits - excess limits beyond the underwriting capacity of the admitted market.

One of the types of exposures in the US Surplus Lines Market is unique risks. What is included under this / what are characteristics of these?

Exposures that are difficult to evaluate. New and emerging risks - with no appropriate policy forms and no previous loss experience.

Why is insurance regulated at the federal level?

Federal government is responsible for regulating because of a decision made by the supreme court that says insurance is interstate commerce and subject to federal regulation.

Financial Solvency Core Principals from the NAIC: (1) Regulatory reporting, disclosure, & transparency - Requires insurers to...

File standardized reports annually and quarterly to assess the insurers risk & financials. These reports contain quantitative and qualitative information that is updated as necessary to incorporate significant common insurer risks.

One of the types of rating laws is File-and-Use, what does this law consist of?

File the rate and use it immediately after filing. Regulator may still disapprove. This is used for automobile and homeowners' insurance.

One of the types of rating laws is No Filing, what does this law consist of?

Filing is not required. Regulator may still require justification and may disapprove. If there is a problem of complaint submitted to the regulator and you cannot justify the price, the rate may have to be changed.

One of the types of rating laws is Flex Rating, what does this law consist of?

Filing required if new rates exceed a certain % above or below current rates, rate increase or decrease may be necessary. Allows insurers to may adjustments quickly following changing market conditions.

An insurer licensed to operate in a state, but incorporated in another state is considered a __________ insurer.

Foregien

(1st reason for regulation) What additional risk do insurance regulators also protect consumers from?

Fraud and unethical market behavior

What is the significance of the McCarren Ferguson Act?

Grants regulatory authority to state governments. Limited exemption for antitrust laws - everyone has access to data.

Net Premium = _______ - ________.

Gross premium; reinsurance ceded

(3rd reason for regulation) Regulators are responsible for determining whether insurance rates are _________ _________ to prevent destructive competition.

High enough.

One of the purposes of state regulators is to protect insurer solvency, what causes a state regulator to be alerted to take action?

If an insurance company fails 4 of the 12 financial ratios. Regulator monitors this already and may already be taking action.

(Insurance regulation) The state insurance department ___________ and ________ insurance laws.

Implements; Enforces

What was the significance of Attorney General vs. ISO (Insurance Services Office)?

In 1988, ISO becomes INDEPENDENT from insurance companies' control because they were sued for price fixing and WON; they no longer provide advisory rates. They only provide advisory loss costs and advisory form language.

(1st reason for regulation) Another way insurance regulators help protect consumers is by providing them with ______________ about insurance matters so that consumers can make more informed decisions.

Information.

After the Attorney General vs. ISO (Insurance Services Office) case: ISO is no longer allowed to provide final rates but could provide loss costs. Insurance industry still allowed to collect data together but it has to be done by an independent organization. This independent organization can sell that loss data back to companies. How do insurance companies now come up with a final rate in relation to the outcome of this case?

Insurance companies take their loss data and may make their own adjustments to it based on their own underwriting expertise and add in their own expense factor and profit factors to come up with a final rate.

What was the significance of Paul vs. Virginia (1869)?

Insurance is NOT interstate commerce, therefore states shall regulate insurance. Paul was an insurance agent selling insurance in 2 different states and the Supreme court decided at the end that it is not interstate commerce and states had the authority to regulate it.

There are 12 financial ratios (IRIS ratios) used by the NAIC, if a company violated or fails ____ out 12 that triggers an alert to the state regulators.

4

Combined ratio = ? What is the goal for this ratio and what does it tell us?

= (Loss ratio + expense ratio). We want it to be less than 100%. Over 100% tells us for every premium dollar we earn we are taking out 1.XX. Tells us if we are profitable with our insurance operations.

IRIS Profitability Ratio: Change in Surplus = ? What is this goal for this ratio?

= (adjusted surplus current year - prior year) / (adjusted surplus prior year). Adjusted for deferred acquisition expenses. The goals is to be between -10% and 50%.

IRIS Liquidity Ratio: Agents' Balance to Surplus = ? What is the goal for this ratio?

= (agents' balances) / (policyholders' surplus). We want it to be less than 40%.

IRIS Leverage Ratio: Surplus Aid to Surplus = ? What is the goal for this ratio and what does is measure?

= (ceding commission from nonaffiliated reinsurers) / (policyholders' surplus). We want it to be less than 15%. It is a measure of whether the company is relying on reinsurance for surplus relief.

IRIS Profitability Ratio: Two Year Overall Operating = ? What is the goal for this ratio and what does it tell us?

= (combined ratio) - (net investment income / net premium earned). We want it to be less than 100% and it tells us how profitable we are overall.

IRIS Loss Reserving Ratio: Estimated Current Reserve Deficiency to Surplus = ? What is the goal for this ratio?

= (estimated reserve deficiency) / (policyholders' surplus). The goal for this ratio is to be less than 25%.

IRIS Leverage Ratio: Gross Premium to Surplus = ? What is the goal for this ratio?

= (gross premium written) / (policyholders' surplus). We want it to be less than 900%. Gross premium is a measure of the full risk that a primary company has assumed.

IRIS Profitability Ratio: Investment Yield = ? What is the goal for this ratio and what does it tell us?

= (net investment income) / (average invested assets). We want it to be between 4.5% and 10%. Tells us our return on invested assets.

IRIS Leverage Ratio: Change in Writings = ? What is the goal for this ratio and what does is measure?

= (net premium written current year - prior year) / (net premium written prior year). We want it to be less than 33% either way. It is a measure of whether the company is growing or not.

IRIS Leverage Ratio: Net Premium to Surplus = ? What is the goal and what triggers it?

= (net premium written) / (policyholders' surplus). We want it to be less than 300%, but the rule of thumb is 200%. 300% or more causes trigger.

IRIS Loss Reserving Ratio: One-Year Reserve Development to Surplus = ? What is the goal for this ratio?

= (one-year reserve development) / (policyholders' surplus prior year). The goal for this ratio is to be less than 20%.

IRIS Liquidity Ratio: Liabilities to Liquid Assets = ? What is the goal for this ratio?

= (stated liabilities) / (liquid assets). We want it to be less than 105%.

IRIS Loss Reserving Ratio: Two-Year Reserve Development to Surplus = ? What is the goal for this ratio?

= (two-year reserve development) / (policyholders' surplus second prior year). The goal for this ratio is to be less than 20%.

In insurance regulation, the NAIC provides 'model law,' what is this?

A document drafted by the NAIC, in a style similar to a state statue, the reflects the NAIC's proposed solution to a given problem or issues and provides a common basis to the states for drafting laws that affect the insurance industry. Any state may choose to adopt the model bill or adopt it with modifications. Results in some degree of uniformity among the states.

What is model regulation?

A draft that may be implemented by a state insurance department if the model law is passed.

What is Solvency II?

A regulatory standard to reduce insurer insolvencies and standardize RM requirements.

What is a guaranty fund?

A state-established fund the provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in that state.

What are the 6 Insurer Rating Agencies discussed in class?

AM Best, Standard & Poor's, Moody's Investor Service, Fitch, Weiss Research, and Demotech Inc.

What are the 3 rate regulation goals (all states have these 3 goals)?

Adequate pricing (most cover claims and expenses; must not jeopardize solvency); Not excessive pricing to protect customers from being taken advantage of (level of competition and rate variation; loss experience and profit margin; possibility of cat losses; fair rate return); Not Unfairly Discriminatory - fair and consistent discrimination, actuarial fairness but not discrimination based off socially unacceptable criteria such as race and religion.

Who was Solvency II adopted by and when was it effective as of?

Adopted by 27 EU member states and 3 EEA countries. Effective January 1, 2016.

There was call for more federal regulation of insurance in Congress in early 1990's. As a result of what (2 things)?

After a peak number of insurer insolvencies, and after publication of the Congressional report entitled "Failed Promises" and a follow-up report entitled "Wishful Thinking"

The Risk Based Capital formula provides risks that are adjusted and used to adjust surplus in measuring the financial strength of a PC insurance company. One of those is Credit Risk. What is this based on and what could happen here?

Agent in financial difficulty - possibility the premiums owed to the insurer by the agent will not be paid. Reinsurance companies - reinsured losses owed to the insurer or other receivables will not be paid.

An insurer domiciled in a country other than the US is considered a ________ insurer.

Alien

What is the significance of the Gramm-Leach-Billey Act?

Allows merging of banking, insurance and securities. Uniform agent licensing or reciprocally required.

Insolvency can be defined as a situation in which...

An entity's current liabilities (as opposed to its total liabilities) exceed its current assets.

Risk based capital (created by the NAIC in early 1990s) is a formula used to more accurately measure what?

An insurers risk and adequacy of its capital. It was immediately adopted in annual statements.

Financial Solvency Core Principals from the NAIC: (2) Off-site monitoring & analysis - Activities include...

Assess financial condition on-going of the insurer. Identify & assess current and prospective risks through risk-focused surveillance. Many off-site monitoring tools are maintained by the NAIC, such as the NAIC Financial Analysis Solvency Tools (FAST).

The Risk Based Capital formula provides risks that are adjusted and used to adjust surplus in measuring the financial strength of a PC insurance company. One of those is Off-Balance Sheet Risk. What is this based on and what can be done?

Based on possible failure of affiliated company. Guarantee Fund assessments for the failure of other insurers.

The Risk Based Capital formula provides risks that are adjusted and used to adjust surplus in measuring the financial strength of a PC insurance company. One of those is Asset Risk. What is this based on and what is assumed here?

Based on the investment profile of the company - most of it (about 60%) in bonds. An insurer's asset value may be lower than expected.

The Risk Based Capital formula provides risks that are adjusted and used to adjust surplus in measuring the financial strength of a PC insurance company. One of those is Underwriting Risk. What is this based on and what is assumed here?

Based on the product mix (different types of insurance) that the company has underwritten. Property insurer assumes less risk than an insurer underwriting mostly medical malpractice liability. This is the biggest risk for a property liability company because of the uncertain severity and timing of losses. This type of risk is the greatest adjustment in this formula.

One of the most important reasons for insurance regulation is to maintain insurer solvency, why is this a concern for property casualty insurance companies?

Because they have long lost development periods and claims may take years to develop. We need to make sure that insurance companies stay financial strong in order to pay claims.

(1st reason for regulation) Regulators help to protect consumers by reviewing insurance policy forms to determine whether they ___________ consumers and __________ with state consumer protection laws.

Benefit; comply

Top 10 Market Conduct Actions Against PC Insurers: (4) Failure to ________, non-renew, or renew policies in accordance with requirements.

Cancel.

What type of activities do state regulators get involved in or require, in order to ensure market conduct?

Certificate of authority for insurer; Licenses for agents, brokers, claims; Continuing education requirements; Rates and forms; Trade practices; Consumer complaints; Buyers information (guide) - some states will provide guides about purchasing automobile insurance or homeowners insurance or small business insurance, varies among the states.

Top 10 Market Conduct Actions Against PC Insurers: (1) Failure to acknowledge, pay, investigate or deny ________ within specified timeframes.

Claims.

The state insurance department implements and enforces insurance laws. Who could these people be?

Commissioner or superintendent.

What does a licensing status of an admitted insurance company mean?

Companies and filed and received a certificate of authority in a state to operate as an insurance company in that state. Have a license to sell insurance in the states that guarantee funded programs.

What are the 4 threshold levels of action under risk based capital (state level insolvency regulation)?

Company action; Regulatory action; Authorized control; Mandatory control.

The NAIC - an association of insurance commissioners from 50 US states, the District of Columbia, the 5 US territories and possessions - purpose is to...

Coordinate insurance regulation activities among the various state insurance departments. They have NO regulatory authority.

Gross Premium = _______ + ________.

Direct premium; reinsurance assumed

Top 10 Market Conduct Actions Against PC Insurers: (2) Failure to provide required compliant __________ in claims processing.

Disclosures

What are the types of exposures in the US Surplus Lines Market?

Distressed risks; Unique risks; High-capacity risks; Niche markets.

Top 10 Market Conduct Actions Against PC Insurers: (8) Improper/Incomplete ______________ of claim files.

Documentation.

An insurer doing business in the jurisdiction in which it is incorporated is considered a ___________ insurer.

Domestic

One of the 4 things Insurance Company Ratings are typically based on is operating performance. What does this entail?

Earnings stability and sustainability.

What are the 3 MAIN reasons for insurance regulation?

(1) To protect customers; (2) To maintain insurer solvency; (3) To prevent destructive competition.

What does a licensing status of a non-admitted insurance company mean?

Also referred to as "excess and surplus lines" Non-licensed. They do not have a certificate of authority but still sell insurance in the states. Regulators categorize eligible/authorized non-admitted insurers.

Top 10 Market Conduct Actions Against PC Insurers: (10) Improper/Incomplete ______________ of underwriting files.

Documentation.

After the first call for more federal regulation in the early 1990's, call for more federal regulation raised again after what?

Financial downturn in 2008 - 2009 & AIG's situation.

Direct Premium =

Total premium for exposure without adjustment for reinsurance.

One of the 4 threshold levels of action under risk based capital (state level insolvency regulation) is Mandatory Control. What happens here?

Insurer IS placed under regulatory control for rehabilitation or liquidation.

One of the 4 threshold levels of action under risk based capital (state level insolvency regulation) is Authorized Control. What happens here?

Insurer MAY be placed under regulatory control for rehabilitation or liquidation.

Financial Solvency Core Principals from the NAIC: (3) On-site, risk-focused examination - Activities include...

Insurers corporate governance, management oversight, and financial strength is evaluated, including the system of risk identification and mitigation both on a current and prospective basis. Enterprise Risk Management (ERM). The reported financial results are assessed through the financial examination process and a determination is made of the insurers COMPLIANCE with legal requirements.

(2nd reason for regulation) Solvency regulation protects insureds against the risk that...

Insurers will be unable to meet their financial obligations.

What is the Quarterly Alien List, provided by the NAIC?

International insurers that have filed: financial statements, auditor's reports, name of attorney representative, trust account information.

What role do the courts play in insurance regulation?

Interpret laws and insurance contract disputes.

What was the significance of the Sherman Antitrust Act (1890)?

It was decided that insurers may not work together to control insurance rates and coverages. Prohibited certain types of business collisions, this was one of them relevant to insurance.

What are the 2 IRIS Liquidity Ratios?

Liabilities to Liquid Assets; Agents' Balance to Surplus.

One of the purposes of state regulators is to ensure market conduct, what does market conduct involve?

Licensing of insurance companies, agents, and brokers (and in some states - claims adjusters).

Financial Solvency Core Principals from the NAIC: (5) Regulatory control of risk-related activities - The transactions/activities encompass...

Licensing requirements; Change of control; Amount of dividends paid; Transactions with affiliates; Reinsurance

Top 10 Market Conduct Actions Against PC Insurers: (6) Failure to adhere to producer appointment, termination, records, and/or ______________ requirements.

Licensing.

Financial Solvency Core Principals from the NAIC: (4) Reserves, capital adequacy & solvency - Requires insurers to...

Maintain reserves & capital at all times to provide an adequate MARGIN OF SAFETY in our balance sheet. Most visible measure of capital adequacy requirements is associated with the risk-based capital formula - standardized to benchmark level of regulatory actions for weakly capitalized insurers.

State insurance funding comes from what sources, but which is the major source of state insurance funding?

Major source - Premium taxes. Other sources - audits fees, filling fees, and licensing fees.

One of the types of exposures in the US Surplus Lines Market is Niche markets. What are these?

Markets not served by licensed carriers.

One of the types of rating laws is Use-and-File, what does this law consist of?

May use the rate and then file after. The regulator may still disapprove.

The US surplus lines market is for types of exposures that end up in what market?

Nonadmitted

What are the 3 IRIS Loss Reserving ratios and why are these important?

One-Year Reserve Development to Surplus; Two-Year Reserve Development to Surplus; Estimated Current Reserve Deficiency to Surplus. These are important to keep track of and look at because the leading reason for insurance company failure is inadequate loss reserves.

Financial Solvency Core Principals from the NAIC: (7) Exiting the market and receivership - Ensurers...

Orderly exists and payment of insured obligations.

Top 10 Market Conduct Actions Against PC Insurers: (5) Failure to issue correct ____________ and/or compliant denial notices.

Payments.

Top 10 Market Conduct Actions Against PC Insurers: (7) Failure to __________ total claims properly.

Process.

What is the significance of the Violent Crime Control & Law Enforcement Act?

Prohibits felons from working in the insurance business unless approved by an insurance regulator.

What is the significance of the Fraud Prevention Act?

Protects consumers and insurers against insolvencies resulting from insurance fraud. It prohibits anyone with a felony conviction involving trustworthiness from working in the business of insurance unless they secure written consent of an insurance regulator. It establishes that it is illegal for an insurer, reinsurer, producer or other similar entities to employ a felon with a conviction involved breach of trust or dishonesty.

When there were calls for more federal regulation, what supported arguments FOR federal regulation?

Quality of staff and adequacy of resources (that state regulators do not have). Greater efficiency. Uniformity. States have not regulated adequately in the past. States may be too responsive to insurers.

What are the reasons (factors that contribute) for insurer insolvency?

Rapid premium growth; Inadequate insurance rates; Inadequate reserves; Excessive expenses; Lax controls over managing general agents; Uncollectible reinsurance; Fraud

One of the insurer rating agencies is Weiss Research, what differentiates them?

Rates insurers based on independent, published, quantitative-only information. Rates likelihood of insolvency with a normal distribution of "grades." Evaluates insurers at "arm's length" (no interviews or insurer presentations).

One of the insurer rating agencies is Fitch, what differentiates them?

Rates insurers on ability to meet obligations to policyholders; purchased the Duff & Phelps rating organization

One of the insurer rating agencies is Standard & Poor's, what differentiates them?

Rates insurers' claims-paying ability; give QUALIFIED solvency ratings unless insurers pay for further analysis.

One of the insurer rating agencies is Demotech, Inc., what differentiates them?

Rates property and casualty insurers, title insurers, HMOs, and self-funded organizations.

One of the insurer rating agencies is Moody's Investment Service, what differentiates them?

Rates publicly traded insurers for long term investment risk.

One of the insurer rating agencies is AM Best, what differentiates them?

Rates the largest number of insurers; quantitive and qualitative evaluation; induces insurers to operate prudently, and maintain strong financials.

Top 10 Market Conduct Actions Against PC Insurers: (3) Using unapproved/unfilled ________ and rules or misapplying rating factors.

Rates.

(1st reason for regulation) Another way insurance regulators help protect consumers is by ensuring that insurance is __________ available, especially the insurance that is viewed as a necessity.

Readily.

What is the role of the Securities Exchange Commission (SEC)?

Regulates sales of securities of publicly owned insurers. Regulates sales of products that include securities.

What was the significance of the Gramm-Leach-Billey Act?

Repealed the Glass-Steel Act of 1933, which is a law that separates investment banking from retail banking. The Glass-Steel Act of 1933 was no longer necessary because there was enough regulation for protection in the industry. This act (GLB), allows banks, insurers and other financial service providers to engage in each others business. Allows merging of banking, insurance, and securities.

One of the 4 threshold levels of action under risk based capital (state level insolvency regulation) is Regulatory Action. What does this entail?

Require a plan or advised plan, perform examination, order corrective actions.

What type of activities do state regulators get involved in, in order to protect insurer solvency (financial strength)?

Requiring people to submit annual & quarterly financial reports in which are designed by the NAIC. These reports gather financial information that the Insurance Regulatory Information System (IRIS) feeds into their database, which is managed by the NAIC. They do financial examinations by running a series of financial ratios on each insurance company based on data. They also have guaranty funds - each state has 2, one for PC/PL companies and one for life insurance companies (NJ has an additional for non admitted insurance companies).

What was the significance of the South-Eastern Underwriters Case (1944)?

Reversed earlier 1869 Paul vs. Virginia decision that said insurance is NOT interstate commerce. Insurance, now, IS interstate commerce; therefore, should be regulated by the federal government and antitrust laws apply.

What does the risk based capital formula provide?

Risks - underwriting risk, asset risk, credit risk, and off-balance sheet risk - that are adjusted and used to adjust surplus in measuring the financial strength of a PC insurance company.

Risk based capital (created by the NAIC in early 1990s) involves model act language to give 4 threshold levels of action, before minimum capital is reached, to protect the _______ of an insurer.

Solvency

What 2 things does state regulation protect?

Solvency of insurance companies and market conduct.

(3rd reason for regulation) is to prevent destructive competition. What is an example of a scenario that explains this situation?

Some may take advantage of the premiums by pricing too low which will further lead to too much capacity to the point that the insurer cannot pay out claims.

One of the 4 things Insurance Company Ratings are typically based on is Business Profile. What does this entail?

Spread of risk - geographically; mix of business; competitive market position; quality of management.

Insurance is regulated at the state AND federal level, but mostly at the _______ level in the US.

State

One of the types of rating laws is Prior-Approval, what does this law consist of?

State insurance department approval of rates ahead of time, usually 30 to 90 days.

Risk Based capital is part of insolvency regulation at what level?

State.

The primary source of insurance regulation is ________ insurance departments, led by state insurance ______________.

State; Commissioners

(Insurance Regulation) Legislature enacts ________ laws regulating insurance, Congress enacts ___________ laws regulating insurance.

State; Federal

What are antitrust laws (aka competition laws)?

Statues developed by the US government to protect consumers from predatory business practices. They ensure that fair competition exists in an open-market economy.

What was the significance of the Dodd-Frank Act?

Systemic risk regulation - higher capital required for companies that had more systematic risk. Federal Insurance Office - monitors business, gets involved in international treaties about regulation of insurance. Nonadmitted and reinsurance reform.

Financial Solvency Core Principals from the NAIC: (6) Preventive and corrective measures, enforcement - Require insurers to...

Take action to improve performance; Take control of operations; Enforced as necessary.

What is the role of Internal Revenue Service (IRS)?

Tax insurers, provide rules regarding taxable status of some insurance products.

Explain the significance of the McCarran-Ferguson Act (1945).

The authority to regulate insurance was granted to the states as long as they do a good job. Antitrust laws still apply (cannot engage in antitrust), except for data gathering. The federal government still retains ultimate authority.

What is the Annual Bank Statement?

The financial report designed by the National Association of Insurance Commissioners (NAIC) for property casualty insurance companies to submit to state regulators. Yellow, Print size 8.5 by 14 inch.

IRIS Leverage Ratios determine what? What 4 ratios are included here?

The financial strength of the insurance company. Includes: Net Premium to Surplus, Gross Premium to Surplus, Change in Writings, and Surplus Aid to Surplus

What is gross premium a measure of and how is it calculated?

The full risk that a primary company has assumed. Gross premium = Direct premium + Reinsurance assumed.

The purpose of the NAIC's accreditation program is to increase the uniformity of insurer solvency across the states. To become accredited, a state Insurance Department must prove that it has satisfied the program's minimum solvency regulation standards. What does certain criteria include?

The state's insurance laws and regulation must meet the basic standards of NAIC models. The state's regulatory methods must be acceptable to the NAIC. The state's insurance department practices must be adequate as defined by the NAIC.

What do we have to be cautious of in the US Surplus Lines Market?

They are NOT protected by the state guaranty fund, except for in NJ.

One of the types of exposures in the US Surplus Lines Market is distressed risks. What are they and why are they here?

They are exposures that are unacceptable to most insurance companies and that is why they end up in the surplus lines (nonadmitted) market.

(1st reason for regulation) How do state insurance regulators help protect customers through insurance regulation?

They can review policy language and disapprove policy forms and endorsements that are inconsistent with state consumer protection laws.

(1st reason for regulation) How do state legislators help protect customers through insurance regulation?

They can set coverage standards and specify policy language for certain insurance coverages.

One of the 4 threshold levels of action under risk based capital (state level insolvency regulation) is Company Action. What does this entail for an insurer?

They must produce a plan to restore capital levels such as adding capital, buying reinsurance, reducing the amount of insurance underwritten, or pursing a merger/acquisition.

What does the NAIC (National Association of Insurance Commissioners) contribute to insurance regulation?

They provide ratios, databases and model laws.

What is the purpose of the NAIC's accreditation program?

To increase the uniformity of insurer solvency across the states. To become an accredited state the specific insurance department must prove that it has satisfied the programs minimum solvency regulation standards.

What is the purpose of rating laws?

To meet regulation goals (adequate, not excessive, and not unfairly discriminatory)

What is the primary reason that insurance is regulated?

To protect customers.

What are the 3 IRIS Profitability ratios?

Two Year Overall Operating Ratio; Investment Yield; Change in Surplus.

When there were calls for more federal regulation, what supported arguments AGAINST federal regulation and FOR state regulation?

Understanding of local issues; states more responsive to local needs. Great opportunity for innovation in regulation. Promotion of uniform laws by the NAIC. Decentralization of political power. Unknown consequences of federal regulation.

One of the 4 things Insurance Company Ratings are typically based on is ERM (Enterprise risk management). What does this entail?

Underwriting risk, strategic risk, operational risk, credit risk, investment market risk.

One of the 4 things Insurance Company Ratings are typically based on is Balance sheet strength (solvency). What does this entail?

Underwriting, financial, and asset leverage.

Top 10 Market Conduct Actions Against PC Insurers: (9) Failure to provide required compliant disclosures in ___________ process.

Underwriting.

Insurance Company Ratings are typically based on what 4 things?

[1] Balance sheet strength (solvency); [2] Operating performance; [3] Business profile; [4] Enterprise Risk Management (ERM).

What 4 main things does the NAIC provide?

[1] Financial Reports - Designs the format and content of the annual and quarterly financial. [2] Insurance Regulatory Information System (IRIS) - 12 financial ratios to monitor property casualty insurers, 12 for life insurers. Maintains financial database of insurers. [3] Risk Based Capital Formula and Model Law - measures underwriting risk, asset risk, credit risk, and off-balance sheet risk of insurers. [4] Accreditation program - to improve quality of state regulation, states must meet standards in resources and model laws, financial exams by accredited regulators will be accepted by other state regulators.