AFE 2 Unit 2
o locus of control (whether handled by state vs fed gov) o extent of regulation o collaboration among ins cos
3 main issues of ins regulation
1) state ins depts. 2) Nat'I Assoc of Ins Commissioners (NAie) 3) fed regulation
3 main regulating agencies
prior approval laws.
Although some states have since changed to other systems, the approach to the regulation of property and liability insurance rates that was adopted by most states in the late 1940s is:
an increased focus on the supervision of insurance groups.
Changes to U.S. solvency regulation as a result of the NAIC's Solvency Modernization Initiative include which of the following?
(a) shared markets, such as state Automobile Insurance Plans. (b) government insurance programs. (c) gender neutral rating.
Cross subsidies in the insurance market occur in the case of
(a) the amount of capital or surplus an insurer must have to operate in the state. (b) the insurance policy forms used in the state. (c) the trade practices of any life insurer transacting business in the state.
In most states, the Commissioner of Insurance directly regulates all of the following
the consumer cannot always evaluate the product.
One reason that regulation of insurance is considered necessary is the fact that
exempted the insurance industry from certain federal anti-trust laws, provided the states do an adequate job of regulation.
Public Law 15 (the McCarran-Ferguson Act)
rebating.
Splitting the commission with the buyer on a sale of insurance is known as:
created the Financial Stability Oversight Council to identify systemically important financial institutions.
The Dodd-Frank Act
judge the adequacy of an insurer's capital based on the specific risks facing that insurer.
The NAIC risk-based capital standards
requires a state to enact certain model laws developed by the NAIC to receive accreditation.
The NAIC state Financial Regulation Standards Accreditation Program
insurance is interstate commerce, and is therefore subject to federal regulation.
The South Eastern Underwriters Association case established that
insurance is vested in the public interest.
The insurance industry is subject to a greater degree of control than are most other industries because
guarantee fair contracts at fair prices from sound insurers.
The primary purpose of government regulation of insurance is to
(a) standards set by the International Association of Insurance Supervisors (b) the need to cooperate with other regulators in the supervision of internationally active insurance groups (c) periodic assessments by the IMF under the Financial Sector Assessment Program.
U.S. insurance regulation is influenced by
reasonable, adequate, and not unfairly discriminatory.
Virtually all states have enacted legislation providing that rates must be
(a) an income distribution problem. (b) an exposure with excessive hazards and costs. (c) unwillingness of insurers to write insurance at a loss.
When insurance is not available at affordable prices for some buyers, the situation may reflect
(a) risk-based capital requirements. (b) financial reporting requirements. (c) regulation of reserves.
Which of the following is a form of solvency regulation?
laws prohibiting twisting.
Which of the following is not a component of the solvency regulation of insurance companies?
advocates of states' rights.
Which of the following opposes a shift to a system of federal regulation for insurance include
• part of Violent Crime Control & Law Enforcement Act of 1994 • prohibits anyone w/ felony involving trustworthiness from working in ins unless he gets written consent from an ins regulator • illegal for ins co/producer from employing person who has felony involving breach of trust or dishonesty • IDs crimes involving the biz of ins
fed regulation - Ins Fraud Protection Act
o Uniform Certificate of Authority Application {UCAA - allows ins cos to file same application for admission into several states - saves time as ins cos don't have to submit separate application for each state
licensing
• ins co who is domiciled/incorporated in a country outside the US • requirements • usually must renew license annually • must satisfy min requirements in state they are seeking license for • must establish a branch office in state they are seeking license for • must have funds on deposit in US equal to min capital & surplus
licensing - alien insurers
• ins co that is licensed to operate in diff state(s) than the one they're incorporated in • requirements • usually must renew license annually • must satisfy min requirements in domestic state (where they incorporated) • must satisfy min requirements in state they are seeking license for (doing biz in)
licensing - foreign insurers
• ins co that is not licensed to do biz in the insd's home state most common example is a surplus lines broker • insd are allowed to do biz w/ a specially-licensed surplus lines producer if: • ins is not readily avail from admitted insurers • nonadmitted insurer is "acceptable" o files financial statement that ins commissioner finds satisfactory o supplies docs of transactions to state regulators o obtains certificate of compliance from home state/country o (if alien insurer) maintains trust fund in US • producer has special license authorizing him to place such ins • rates/forms are not regulated
licensing - nonadmitted insurers
• examines nonadmitted insurers1 financial condition, trust funds, and trust deposits
licensing - nonadmitted insurers - • NAIC's International Insurers Dept (110)
o list of alien insurers that meet NAIC's 4 standards • capital & surplus requirements • trust fund requirements • biographical affidavits from directors & officers • annual filing of audited financial statements used by several states as eligibility list for alien nonadmitted ins cos
licensing - nonadmitted insurers - • NAIC's International Insurers Dept (110) • NAIC's Quarterly Listing ofAlien Insurers:
o does not allow any state to prohibit a licensed surplus lines broker from placing ins w/ any from Quarterly Listing ofAlien Insurers o initialed several state-level reforms to make surplus lines market more effective o established a modern, consistent framework for surplus lines regulation o helps ensure that nonadmitted insurers will be able to pay elms, even though they aren't protected by state guaranty fund
licensing - nonadmitted insurers - • NAIC's International Insurers Dept (110) • Nonadmitted & Reinsurance Reform Act (NRRA)
• if required, usually includes background check+ ethics requirements
licensing - o claims reps
• when multiple cos create a subsidiary ins co to insure them all • once licensed in one state, can do biz in other states w/o license if they file notice & registration forms w/ those states can only write commercial liab ins • might be required to be part ofjoint u/w assoc (JUA) or similar assoc where ins cos share losses
licensing - o risk retention groups
• must be licensed in each state they do biz in • Nat'I Ins Producer Registry (NIPR) - provides one-stop shop for all aspects of producer licensing & appt process • Producer Database (PDB) - e-database that links state licensing systems into 1 common system • NIPR Gateway- communication network that links state regulators w/ entities they regulate to facilitate e-exchange of producer info • Not'/ Assoc of Registered Agents & Brokers Reform Act of 2015 • established a centralized organization that would work w/ individual states to streamline nonresident-producer licensing • created a central clearinghouse for nonresident producers • run as a private, not-for-profit corp • does not affect any individuat state's law or rights to regulation ins w/i its borders • members only need to be a resident producer in their own state to qualify as nonresident procedure in other participating states • members' participation is 100% voluntary
licensing - producers (parties that sell or place biz for ins cos)
• ins cos that do business in the same jurisdiction where it is incorporated • license generally has no expiration date • must meet same conditions imposed on corporations that aren't ins cos • must also meet special conditions imposed on ins cos • apply for charter • provide names/addresses of incorporators • name of proposed corp • territories & types of ins • requirements for capital stock (amt that stockholders have contributed by buying stock) o mutual or reciprocal insurers don't have this requirement b/c don't have stock • paid-in surplus: amt stockholders paid in excess of par value of
licensing -domestic insurers
• license required in some states, if giving advice or opinions about
licensing -ins consultants
• major study that collected data from 29 states • purpose of study: o define scope of mkt anarysis program o determine min required skills & education necessary for mkt analyzers o develop, prioritize, coordinate data collection & analysis techniques o make recommendations regarding expansion of data elements for MCAS o develop analysis techniques to ensure states expand focus from company- specific issues to general mkt program o ensuring consumer protection • respond to consumer complaints • provide info/education to consumers
mkt analysis - Market Conduct Annual Statement (MCAS)
o penalties for unfair trade practices • fines per violation • suspension/revocation of license o Nat'I Asssoc of Ins Commisioners (NAIC)'s Model Unfair Trade Practices Act • prohibits any activity that would restrain trade/competition in biz of ins • prohibits misrepresenting your own or another ins co's financial status
mkt conduct & consumer protection
producer practices u/w claims
mkt conduct & consumer protection - o 3 key areas of mkt conduct
■ examples of bad faith (bad elm handling): o misrepresenting important facts or pol provisions o failing to properly investigate & settle elms o failing to make good-faith effort to pay elms when liab is reasonably clear o attempting to settle for tess than amt a party is reasonably entitled to o failing to approve/deny cov in reasonable time after proof of Joss statement is done ■ can result in fines per violation • good faith elm handling: handling elm while giving consideration to insd's interests that is at least equal to consideration given to ins co's own interests
mkt conduct & consumer protection - o 3 key areas of mkt conduct - claims
• dishonesty/fraud (ex: embezzling prem payments) misrepresentation of cov • twisting (replacing 1 pol w/ another that is more detrimental to the insd) • unfair discrimination • rebating (giving portion of commission or other incentive to insd to buy pol)
mkt conduct & consumer protection - o 3 key areas of mkt conduct - producer practices
• areas o discriminating unfairly when selecting loss exposures o misclassifying loss exposures o canceling/non-renewing contrary to statutes/rules/pol provisions o using u/w rates/rules not on fite w/ or approved by DOI o failing to apply newly implemented u/w or rating factors to renewals o failing to use correct por forms/rates o failing to use state-specific rules • regulatory methods o restrict ins co's ability to accept/modify/decline ins applications o establish allowable classifications o restricting timing of cancellations/renewals
mkt conduct & consumer protection - o 3 key areas of mkt conduct - u/w
• adequacy of state's solvency laws/regulations to protect consumers • state's ability to meet standards regarding financial analysis & examination process of ins cos • state's ability/willingness to coop & share info w/ other state/fed/foreign regulators • state's ability to take timely/effective action when ins co is ID'd as financially troubled • quality of state's organizational/personnel practices • effectiveness of processes for licensing & review of proposed changes in control
monitoring ins co solvency - evaluating a state's accreditation system
• regulatory reporting, disclosure, transparency [i.e., filing standardized reports] • off-site monitoring & analysis • on-site, risk-focused examinations • reserves, capital adequacy, solvency • risk based capital (RBC) system: uses formula to benchmark levels of actions needed for ins co that are financially weak • regulatory control of significant risk-related transactions/activities • licensing requirements • change of control • amt of dividends paid • transactions w/ affiliates • re-ins • preventive & corrective measures, including enforcement • when regulatory authority forces changes on ins co • exiting the mkt & receivership (for when ins co wants to leave marketplace)
monitoring ins co solvency -7 core solvency principals
• submit financial statements • use NAIC's Acct Practices & Procedures Manual & Annual Statement Blank and Instructions for consistency • disclose differences when using state-approved guidelines to report acct transactions • submit financial statements to CPA for audit • have reserves audited by actuary to attest to accuracy of reserve estimates • perform RBC calculation & submit results to regulators • adhere to state min capital & surplus requirements • limit types/quantities of investments that ins cos can make • report investment values to NAIC Securities Valuation Office • limit on dollar amt of risk for any single insured that an ins co can u/w • re-ins is governed by NAIC Credit for Re-ins Model Law
monitoring ins co solvency -examples of solvency requirements
• state-established fund that helps cover some unpaid elms if an ins cos licensed in that state goes insolvent • purpose is to mitigate effects of ins co going insolvent • usually funded by assessments/fees collected from all ins cos licensed in that state • all states' funds cover HO & auto claims • these elms are governed by separate laws • some types of ins are not covered by fund • self-insd groups are not protected • risk retention groups are prohibited by fed law from participating in guarantee funds
monitoring ins co solvency -guarantee funds:
• assessments made only after an ins co fails {except in NY) • pols usually terminate w/i 30 days of failure date & unpaid elms before termination are still valid/payable from guarantee fund if ins co was licensed in state • no guarantee funds for re-ins or surplus lines (except NJ) • elms subject to max limits (usually lesser of $300k or pol limit • most states provide refund of unearned prem • most states apply $100 ded to unpaid claims but exempt workers comp from ded • state must divide fund into separate accts (auto, workers comp, etc) • assessment recovery (rebuilding the fund) varies from state to state
monitoring ins co solvency -guarantee funds:• (8) common characteristics
• reduce insolvency risk • protect public against loss when ins cos fail
monitoring ins co sotvency - 2 broad goals
• looking at ins mkt overall, rather than focusing on specific companies • allows regulators to JD general mkt disruptions • promotes uniform analysis by applying consistent measures among ins cos • facilitates communication from regulators btwn diff states • Market Conduct Annual Statement (MCAS)
o mkt analysis
• prior-approval (DOI must approve rate before implementation) • file-and-use • use-and-file (ins co aan use rates first & submit filing later) • no filing (open competition} • flex rating (only requires pre•approval if new rates exceed certain% above/below old rates)
o types of rating laws
o to protect consumers • to ensure ins cos maintain solvency • to prevent destructive competition
reasons for regulation
• ins cos have responsibility to insds • helps protect public interest (would be catastrophic if large ins co goes under) • if ins co goes insolvent, elms might not be paid & pol already paid for might be worthless
reasons for regulation - to ensure ins cos maintain solvency
• if ins co sets price to low in trying to be competitive, ins co has risk of going bankrupt • can result in certain types of ins becoming unavail
reasons for regulation - to prevent destructive competition
• determine if pols benefit consumers & comply w/ govt requirements • protect against fraud & unethical mkt behavior • intentionally selling unnecessary ins • misrepresenting cov to make sale • stealing/misusing funds received from insd/ins co • unfair claims practices • ensure ins is readily avail • restricting ins co cancellations • provide info so consumers can make informed decisions
reasons for regulation - to protect consumers
o helps protect consumers who may not u/s pol o pols must benefit customers & comply w/ consumer protection laws o readability tests • refers to physical format of pol (margins, fonts, etc.) • doesn't necessarily measure how well pol is understood o prior approval law: pol is approved if certain time passes & pol hasn't specifically been disapproved
regulating ins pols
• legislation • standard forms • mandatory provisions • prohibited provisions • requiring forms to be filed and/or approved o System for Electronic Rate & Form Filings (SERFF) has sped up process greatly • readability standards • enacting laws regulating the formation of ins cos • regulations communicated by DOI to ins cos • DOl's informal circulars/bulletins • precedents set during approval process • court decisions • helps determine if regulations consistent w/ state law
regulating ins pols - (5) sources of regulation
• adequate (to pay elms/expenses) • not excessive (to help keep ins affordable) • not unfairly discriminatory (towards insds)
regulating ins rates - 3 goals for rates
• factors that complicate this o at time pol sold, ins co doesn't know what expenses/elms will actually be o ins co may want a lower than adequate rate to try be competitive o govt might reject desired rate due to public pol or disagreement over level of rates o unanticipated events can lead to higher than projected losses o govt & ins co actuaries may disagree about assumptions used to determine proposed rates
regulating ins rates - 3 goals for rates - • adequate (to pay elms/expenses)
• factors to consider o # of ins cos selling that specific cov in that territory o mkt share o degree of rate variation btwn ins cos o past/prospective loss experience o possibility of catastrophe losses o margin for u/w profit o mktg expenses o special judgment factors specific to certain types of ins • fair rate of return approach o based on idea that ins co should get at least a min rate of return similar to other types of bizs o govt & investors often disagree on what is fair rate
regulating ins rates - 3 goals for rates -• not excessive (to help keep ins affordable)
• funded primarily through prem taxes • has 3 branches • headed by ins commissioner
state ins depts
• legislative (makes laws) • judicial (interprets laws) • executive (implements laws)
state ins depts. - 3 branches
ins co can use the new rates as soon as they file w/ DOI, before actual approval DOI can disapprove of rates if they can't be justified or violate law
types of rating laws - file-and-use
• (+) rates submitted for approval might be inadequate by the time it gets approved • (+) cheaper to administer, so govt can focus on other areas of ins regulation • (+) allows rates to adjust quickly to mkt/econ conditions • (+) free mkt (rather than gov regulation) is what leads to reasonable & fair rates
types of rating laws - no filing (open competition}
(+) requires ins co to justify requests for increases w/ actuarial data • (+) helps maintain solvency through govt review of data • (+) keeps rates reasonable & fair • (+) prevents ins cos from raising raise to earn excessive profits
types of rating laws - • prior-approval (DOI must approve rate before implementation)
poor mgmt (main root problem) • rapid prem growth • inadequate rates • inadequate reserves excessive expenses • lax mgmt of general agents • not being to collect from reinsurers • fraud • catastrophe losses (when disaster hits & ins co is overwhelmed w/ elms)
• reasons for insolvency
