Insurance Regulation - Chapter 6

Application Requirements

1) Application for Certificate of Authority form (by noting lines of business, DOI can calculate minimum capitalization requirements. Also basis for annual renewal data) 2) Power of attorney - insurer designates through power of attorney document DOI's highest executive to accept service of process on its behalf in all legal proceedings. 3) Business plan or plan of operations - promoters state whey they are seeking certificate of authority and their business plan in much detail form. Many DOI's don't specify certain topics to address giving promoters complete freedom in drafting. Other DOI's provide a list of items to be addressed. 4)Feasibility study and pro forma financial projections - applicant submits for the number of years the state requires (ie. 2-5 years) 5) Other legal documents (Articles of Incorporation and By-laws) these documents must comply with state requirements regarding chosen legal framework. Some states the commissioner incorporates the insurer; however; most states the state corporations or financial divisions accept articles of incorporation after DOI approval. 6) Holding insurer information 7) Insuring Documentation 8) Source of Funding 9) Biographical Affidavits

Insurance licensing - two categories

1) Domestic licensing 2)Foreign and alien licensing

Affidavit form solicits key background info for each director, officer and key person

1) General name and principal identification features (i.e. SS# and birthplace) 2) Educational Background 3) Insurer stock ownership 4) Employment records for 20 years 5) Address records for 10 years 6) Licensing info on any the holder has 7) Criminal and civil records 8)Records of regulatory, criminal and civil adjudications of insurers the affiant has worked. 9) Some states require fingerprints for criminal checks.

Promoters of new insurer prior to licensing must consider these issues

1) Name of Insurer (no two names alike in state - promoters reserve the name) 2) Choice of domicile (if key employees reside in one state, or climate, taxation structure, regulatory requirements factors - promoters choose from outcomes) 3) Product selection (identifying products insurer plans to sell (especially if others fall short). Features may give insurer competitive edge and improve market penetration chances. 4) Market identification (promoters may conduct market research to verify products with appeal in the target market and that they are competitively priced. 5) Distribution (promoters select a marketing and distribution system (ie. using independent agents and direct mailings) 6) Capital requirements (promoters consider amount of capital they have or will raise, the source of capital, adequacy of capital within state lines and whether business will exceed requirements. Amount of capital they put to risk depends on net retention and underwriting factors. 7) reinsurance support (promoters should determine how much reinsurance is needed. Reinsurance is vital for license application) 8) Insurer structure (promoters must make decisions on formation and ownership structure. Some states the structure really matters) 9) Directors, officers and key personnel ( Promoters to decide who will manage day to day operations and who will be initial officers and directors. They should have expertise and experience to satisfy regulators) 10) Key outside advisors and experts (promoters should interview anticipated key outside advisors and contractors - banks, investment managers, legal counsel, accountants and actuaries. Most applications ask for these.

Face to face meetings can

1) encourage DOI to give application priority attention 2) if meeting indicates serious problems, applicant may withdraw. If promoters intend to embark on Multistate licensing project, most applications for foreign certificates of authority will ask whether insurer has had prior licenses denied. to avoid having to speak, promoters may withdraw.

Apply for Alien license insurer

1) submit data required for foreign insurer 2) Appointment of US manager - most states require form or such that applicant has appointed and given authority to US manager. 3) Trust agreement - contract which one party transfers ownership of property to another party and will administer property for 3rd party's benefit. 4) Certificate of alien funds on deposit - Most states require deposit of substantial funds in trust to be retained in US (sometimes in point of entry state)

DOI Methodology

1)domestic - insurer applications receive priority over foreign ones 2) First in/first out - application waits it's turn based on receipt date 3)volume quotas - based on staffing DOI might decide # of applications for consideration for the year. Once quota is met DOI returns excess applications or schedules them for consideration the following year. Volume quotas are not popular in insurance industry and not advertised or stated anywhere. 4) Priority Lines - gives high priority to applications seeking authority to write certain lines of business (underserved consumers). DOI will process the applications in these lines before applications in lines for which consumers are adequately served 5) Licensing cycles - some states accept applications during a certain time frame. If DOI receives app after a certain date, it is returned to the applicant who must wait another year for the submission period to begin. 6) Moratorium - DOI may impose a moratorium on license applications which it accepts no applications or none that seek certain line authorities. DOIs have different reasons (i.e. state has excessive backlog of license applications or DOI may conclude that because there is abundance of competition for certain lines, there is no need for additional insurers in the state. This method is unpopular but is used sparingly)

NAIC Unfair Trade Practices Act

15 practices with 4 relating to marketing 1) Misrepresentations and false advertising of insurance policies - insurers CANNOT state in any way to misrepresent insurance policies benefits or terms, dividends or insurer's financial condition. 2)defamation - Insurers cannot circulate false information about another insurer or their financial condition. 3) boycott, coercion and intimidation - entering in an agreement that results in unreasonable restrain or monopoly of the insurance business 4) unfair discrimination (i.e. redlining underwriting practices resulting in refusal to insure or renew coverage based on applicant's characteristics - sex, religion, origin or insureds prior cancelation by another insurer.

Affiant

A person who provides information on an affidavit and promises that it is true.

Financial Statements

Annual Statements prepared under Statutory Accounting Principles (sap) applicant will have to submit most recent audited statutory financial statements and maybe financial statements prepared under generally accepted accounting principles (GAAP) for evaluation.

Holding Insurer Information

Applicant must disclose any proposed holding company associated with the start-up insurer identifying all controlling persons and affiliates as well as any management or reinsurance agreements with affiliates. A holding or parent company owns enough voting stock in another company to control its operations and management.

Examination Report

Applicant must file recent financial examination performed by state of domicile. Gives DOI insight on operations and compliance with domicile jurisdictions rules and regulations. When applicant has not had a financial exam for several years, some jurisdictions accept a public accountant's certified report prepared on consistency with insurance laws of state of domicile and has been certified by state. States that will not waive requirement for recent financial exam report, applicant might have to withdraw his application or not file until examination has been performed.

Charter and Bylaws

Because applicant has already operated in one jurisdiction, DOI reviews certified copies of the charter and bylaws to evaluate terms of operations as a legal entity.

Market Conduct Regulation

Concerned with consumer protection. By overseeing insurers sales and advertising, underwriting, ratemaking and claim settlement procedures and activities. DOI's protect insurance consumers from unfair discrimination, insurer fraud, excessive rates. Market Conduct Regulation promotes competition within marketplace.

Licensing foreign insurers

DOI can use criteria that experienced or "seasoned" insurers are only acceptable candidates for licensing. 2 - 5 years operational experience. It is often an administrative guideline that it is not disclosed in statutes or regulations. Unless law requires it, a DOI can waive it if insurer has substantial capital, if applicant is owned by insurer with lengthy operational history or if DOI is satisfied with applicant's qualifications.

Certificates of compliance

DOI needs to know applicant is in compliance with domicile jurisdiction regulations and is authorized to transact insurance in domicile state for stated lines of business. Certificate of Compliance serves this requirement. Should be issued within 30 days of license application date.

Annual Statements

DOI reviews results of insurers recent operations by requesting annual statements (i.e. past 2-3 years and quarterly for current year)

Regulatory uniformity

Each state has insurance code and regulations that apply to activities within borders. Insurer operating in 50 states is subject to 50 rules. Historically insurance regulation is reactive (as problem occurs a state legislature enacts legislation to correct the problem - each state arrives at its own solutions incorporated in state laws but is changing due to NAIC. One of NAIC goals is to increase uniformity among state laws. A successful area has been uniformity among state insurance laws with financial examinations. NAIC coordinates that insurers are subject to one exam instead of many.

Holding insurer registration statement

If applicant is member insurer holding system (of 2+affiliated entities - 1 or more an insurer)it must submit holding insurer registration statement certified by state of domicile. Most states require registration statement include audited financial statements for ultimate controlling entity.

Foreign Insurers

If strong performer in one state has an advantage when submitting its application. Insurer has already gone through rigors of domiciliary jurisdiction review and regulations.

Application package

Info has been completed, check and fees are mailed. Fees may be in the thousands.

Ownership form differences

Insurers capitalization structure depends on the corporate ownership it takes. Stock insurers issue stock. (capital is based on par value of shares issued or dollar amount assigned to a security by the issuer.) (i.e. 6M shares at $1 par value issued and outstanding - corporate books reflect $6M in capital. THe amount paid by purchases for shares above $1 par value would be allocated to surplus account.) (insurer seeking authority to sell only casualty insurance and issue 6M shares of stock with $1 par value of $2 per share would fulfill stated minimum requirements of $6M in capital and $3M free surplus - It would raise $12M - $6M in capital and $6M surplus.

Market Conduct

Insurers must always prove business success to DOI's. Regulatory activities are related to: insurers market conduct and insurers solvency. Market conduct regulation focuses on Insurers treatment of insureds, applicants for insurance and claimants in 4 areas of operation (sales and advertising, underwriting, ratemaking and claim settlement). Solvency regulation focuses on insolvent insurers (insurers that may become insolvent, identifying problems that led to their financial impairment and addressing those problems to try to avert insurer insolvencies. Insurance regulatory activities are: market conduct and solvency regulation. (Market conduct regulation protects consumers, solvency regulation protects consumers as well as ensuring insurers are able to pay the insureds claims.)

Before NAIC

Many states have extensive insurance codes and enacted their own insurance laws or based them loosely on NAIC's recommended model laws. NAIC cannot mandate states to adopt models.

Insuring Documentation

Many states review draft policy forms and rate materials to verify coverages to be offered and pricing. Some DOI's wait for applicant to file these materials in final form after licensing insurer. Delaying review can expedite licensing. Bottom line - insurer cannot begin operations until DOI approves forms and rates.

Formation regulation

NAIC is not involved in insurer licensing. processes vary from state to state although all states require property casualty insurers to receive approval before operating in state. In formation stages, persons define why they are undertaking project and how they believe it to be successful. Organizers are promoters.

Insurer to begin operations

Once license is in hand, operations can begin. To do so, Insurer must have DOI approved insurance policy forms. Depending on state law forms can be filed and used without prior approval. States can mandate certain contract wording and standard provisions in the insurance policy. Some states mandate the standard form but permit insurer to add other terms. insurer must conduct a close review of state requirements.

Foreign and Alien Licensing

Once licensed in domicile state, insurers seek to operate in another state or country. In US, insurer licensed to operate in a state but incorporated in another is a foreign insurer. Insurer licensed in US state but incorporated in another country is alien insurer.

Application package submittal

Once preliminary plans are done and ready to seek authority - a large application package is submitted. States have made progress to develop uniform, less complicated processes.

Initial Formation process

Promoters can hire outside parties (i.e. actuarial firms) to conduct studies. Take plans and apply actuarial and financial projections to determine whether assumptions are justified and projected results are reasonable. At this point, things may come to a halt and redefining insurer's plan of operations before submission of application.

DOI receipt of Application

Promoters may seek a meeting with DOI to discuss application, expand on business plan, regulators may interview key persons.

Minimum Capital and Surplus Requirements

Promoters must have enough capital to assure regulators they have stability to survive a competitive marketplace. Trend is being to increase requirements. With new requirements, insurers may be given a time to meet the new requirements or can be grandfathered in. Higher requirements make it difficult to enter state, start-up insurer may not be able to get certificate of authority in states with higher capital and surplus requirements, NY and CA have highest Minimum requirements for Property/casualty insurers. Applicants state minimum capital requirements separately from surplus requirements. New insurers minimum surplus requirements are stated separately from existing insurers minimum surplus requirements.

Solvency Regulation

Regulators can identify early problems they can rehabilitate them or find other insurers to acquire them or their book of business. Key solvency detection method is financial examination. When reviewing financial statements can see weaknesses and will examine further. Examinations are concerned with overall financial strength. On regional and national levels. Several states may join in conducting financial exam of one insurer or group of insurers called association examination with the help of the NAIC. If examiners fail to detect troubled insurers early on, insurers are liquidated. Guaranty funds help cover claims and reimburse unearned premiums.

Biographical affidavits

Regulators consider caliper and experience of key persons overseeing and managing newly created insurer. Many DOI's use biographical affidavit developed by NAIC (or similar) to solicit key background info.

Source of Funding

Regulators review documentation regarding capitalization source (I.,e. borrowed money? DOI evaluates loan agreement and security agreements). (I.e. public or private offering? DOI reviews copies of prospectus or private placement memorandum). If another corporation contributes funds, regulators review recently audited financial statements that verify existence of funds.

NAIC accreditation

Regulators through all states work together to address issues and results in uniform response from the states. (i.e. NAIC accreditation has increased uniformity of state solvency regulation by making accreditation contingent on enactment of model or similar laws.

Foreign insurer application requirements

Similar to domestic insurers. although requirements may differ per state, the following applies to most states 1) Charter and Bylaws. 2) Annual Statements 3) Examination Report 4) Financial Statements 5) Certificates of Compliance 6) Holding insurer registration statement

Underserved Consumers

Situation where DOI determines that its consumers lack access to insurance in certain lines of business.

Additional requirements Foreign insurers

Some States: insurer must submit underwriting criteria with certificate of authority. DOIs need this to ensure parent insurer does not go back and forth between affiliated insurers.

Line Authority

Some states set capitalization requirements for each line of business for which applicants seek authorization. An insurer that does not intend to write certain property liability lines will benefit from lower capitalization requirement. (i.le. insurer has Minimum Capital - $6M Casualty; $10M multiple Line; $6M Vehicle - Must have $22 M in capital) (Same insurer: has Initial Free Surplus - $3M Casualty; $5M Multiple Lines; $3M Vehicle - must have $11 M in free surplus - all of this for applying for Casualty, Vehicle and Multiple Line Authority in State X. Note: The more hazardous lines demand larger capital for potentially significant adverse loss exposure.

Initial Free surplus requirements

The amount of surplus a new stock insurer must provide above the minimum capital required.

Minimum required basic surplus

The amount of surplus existing insurers hold to continue writing insurance. Minimum basic surplus is the same for both mutual and stock insurers.

Some states allocation of capital is critical

Total is not the issue. Neither insufficient capital with abundance of surplus nor insufficient surplus with an abundance of capital is adequate for requirements. (I.e. if stock above had par value of $.75 but insurer still issued and sold $6M shares for $2, capital raised would fall short of minimum capital requirements of $6M because only $4.5 million of $12M raised would be allocated to capital.

Alien Insurers

When alien insurer selects a state to act as its port of entry for establishing the US branch. This happens when they do not establish a subsidiary incorporated in US. Few states have laws that provide for port-of-entry mechanism.

Net Retention

amount of risk an insurer will retain instead of reinsuring

Insurers policies meet contract wording requirements

ensure marketing efforts do not violate any state unfair trade practices laws. Each state has adopted either NAIC model Unfair Trade Practices Act or similar legislation. Laws don't give aggrieved persons causes of action against the insurer but DOI can penalize the insurer monetarily for violating laws and can revoke license for egregious conduct.

Identifying Insurers subject o market conduct exams

examiners rely on consumer complaints, info from other jurisdictions and other indicators (i.e. financial exams). They focus on local (DOIs concerned with their states). Occur on state by state basis and do not cross state lines. Insurer can have multiple market conduct exams with same records in multiple states. Market conduct examiners are moving toward association examinations similar to those used for financial regulation. Association or zone exams several states examine insurer jointly.

Reciprocal insurers or insurance exchanges

group of individuals, corporations and other entities similarly engaged in business that agree to indemnify (reimburse) one another for certain kinds of losses by way of the exchange of insurance contracts. the groups managed by attorneys have no stock or capital. They have contingent liability to members to pay for losses beyond premium income. Some states establish separate capitalization requirements for recipricals. Other states, surplus requirements are the same.

Captive insurers or special purpose insurers

have lower capitalization requirements than other types of insurers. States that seek to attract captive business can draw pressure from other states insurance regulators to increase minimum capitalization requirements which can be low. Although it is good practice for promoters to research statutory minimums in the state they intend to set up their insurer before filing the licensing application, the DOi can set capital requirements above those minimums. Regulators can adjust capital requirements based on the risk of the lines insured,.

Bylaws

indicate powers assigned for insurer operations to officers, directors and insurer's board of directors and officers collectively.

Pro Forma Financial projections

indicate when promoters anticipate that an insurer will reach the break-even point or the point where premiums and investment earnings equal the costs of doing business.

Applicants seeking domestic licensing

insurers must address: 1) location of books and records. The domicile regulator seeks assurance that insurer will retain books and records in the state in order to facilitate regulators access to records. If out of state administrator is to handle insurers operations maintaining duplicate set of records in the state of domile or giving regulator access to records. 2) Principal office - DOIs require insurer seeking domicile to maintain office, if not principal office, in that state. State's motive is to generate jobs in the state. Office location also gives regulator close access to insurer.

Licensing process

it takes long for promoters to seek 1st cert of insurance and insurers seeking to conduct business. Can be months or years in some jurisdictions before DOis approve licenses. It becomes more lengthy and expensive. DOI's give low priority to this. Solvency regulation is higher priority. DOI's have fewer employees. Applicant invests less time to be domestic than to become foreign. Domestic brings jobs to states and revenue. When governor tells insurance commissioner to work on domestic market, applications gain priority. (i.e. VT small economy but attractive captive insurer law-lower premium tax rates - portion DOI devoted to regulation of captive insurers. Prompt attention with quick turnarounds. Brings tax revenues and jobs.

Articles of Incorporation

legal document filed with a state agency that forms a corporation indicate the legal framework the promoters have chosen for the insurer.

Once state regulators approve license application

organizational examination is scheduled before issuing license. SImple as verifying minimum capitalization is on deposit in financial institution. Often examiners visit insurers principle office to verify management team is in place, corporate records are in good order, policy forms and rates bear department approval and banking and financial records are in place. Examiners seek assurance insurer is set to operate in the manner disclosed in the application. Gives the insurer a chance to review with examiners DOI expectations and requirements for financial reporting.

Application for Certificate of authority

pre-printed form which the applicant provides the insurer's name, home address, corporate organizational form and lines of business it seeks authority to write.

Seasoning requirements

prevent start-up insurers from engaging in multistate licensing projects in their initial years of operation. New insurers must therefore focus efforts on gaining operational experience before other states are interested in their expansion plans.

Business plan (or plan of operations)

statement of long-term work that demonstrates individual or organization's professional management ability. Most important part of application process.

NAIC influence

uniformity of state insurance laws increased with McCarran Ferguson Act. Threat of federal intervention instilled spirit of cooperation with regulators. States were then more likely to enact legislation based on the NAIC model laws.

Power of attorney

written document that authorizes one person to act as another person's agent or attorney in fact. (i.e. if papers for a lawsuit are served to insurer at his office and he does not accept them, the DOI can accept them on agent's behalf)