Chapter 2 AINS 21

Surplus lines law

A state law that permits any producer with a surplus lines license issued by that state to procure insurance from an eligible surplus lines insurer if the applicant cannot obtain the desired type of insurance in the admitted market

Guaranty fund

A state-established fund that 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 the state.

National Association of Insurance Commissioners (NAIC)

An association of insurance commissioners from the fifty U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.

Insurance Regulatory Information System (IRIS)

An information and early-warning system established and operated by the NAIC to monitor the financial soundness of insurers.

Domestic Insurer

An insurer doing business in the jurisdiction (state) in which it is incorporated

Alien Insurer

An insurer domiciled in a country other than the United States

Foreign Insurer

An insurer licensed to operate in a state but incorporated in another state

Admitted Insurer

An insurer to which a state insurance department has granted a license to do business within that state

Market conduct regulation

Regulation of the practices of insurers in regard to four areas of operation: sales practices, underwriting practices, claims practices, and bad-faith actions.

Unfair trade practices law

State law that specifies certain prohibited business practices.

what are the three most common forms of insurer ownership

Stock Insurance Companies, Mutual Insurance Companies, Reciprocal Insurance Exchanges

Solvency

The ability of an insurer to meet its financial obligations as they become due, even those resulting from insured losses that may be claimed several years in the future

Reserve

The amount the insurer estimates and sets aside to pay on an existing claim that has not been settled.

NAIC Annual Statement

The primary financial statement prepared by insurers and required by every state insurance department.

Solvency surveillance

The process, conducted by state insurance regulators, of verifying the solvency of insurers and determining whether their financial condition enables them to meet their financial obligations and to remain in business.

describe a nonadmitted insurer and explain how nonadmitted insurers can transact business in a state

a nonadmitted insurer, often refered to as a surplus lines insurer is not authorized by the state insurance department to do business within that state. Under surplus lines laws, a nonadmitted insurer may be permitted to transact business only through a specially licensed surplus lines producer

describe how different states meet the three major criteria for insurance rates

by different types of rating laws that vary in the type and extent of control the states assert over insurers' rates

describe the reciprocal insurance exchange

consists of a series of private contracts in which subscribers or members of the group agree to insure each other.

explain what penalties can be imposed under most state unfair trade practice laws when an insurer is guilty of unfair underwriting practices

could be fined, or its operating license could be suspended or revoked

what are the three primary forms of an insurer's licensing status in any given state

domestic, foreign, or alien

list the four methods regulators use to verify insurers' solvency

establish financial requirements by which to measure solvency conduct on-sire field examinations to ensure regulatory practices Review annual financial statements Administer the Insurance Regulatory Information System (IRIS)

compare a foreign insurer to an alien insurer

forign insurer is a United States insurer that is licensed to do business in a state but is incorported in a different state an alien insurer is a non-US insurer that is licensed to do business in the the U.S. states where it wishes to operate

identify the focus of market conduct regulation

how insurers treat applicants for insurance, insureds, and others who present claims for coverage

describe open-competition rating laws

market prices driven by the economic laws of supply and demand rather than regulatory decisions determine insurance rates. however state insurance departments typically have the authority to monitor competition and disapprove rates if deemed necessary. the major criteria that rates must be aqaquete, not excessive, and not unfairly discriminatory continue to apply

explain why insurance regulators try to maintain and enhance the financial condition of private insurers

premiums are paid in advance and the period of pretection extends in the future. (if an insurer becomes insolvent future claims might not be paid even though the premium has been paid. consumers may find it difficult to evaluate insurers financial ability to keep their promise) regulation is need to protect the public interest. (large numbers of individuals are adversley affected when insurers become insolvent for example usually large catastrophe that affects a large area can make an insurers' financial ability to pay claims uncertain such as when hurricane andrew struck florida in 1992 and cause seven insurer insolvencies. insurers hold substantial funds for the ultimate benfit of policy holders (government regulation is necessary to safeguard such funds)

insurance policy language is usually regulated for what purpose

regulators review insurance language to protect consumers. many insurance policies are complex legal documents that may be difficult for some consumers to analyze and understand. regulators can set coverage standards, specify policy language for certain insurance coverages and disapprove unacceptable policies

explain what penalties can be imposed under most state unfair trade practice laws when an insurance agent engages in unfair trade practice

state regulators can suspend or revoke the license of the sales agents or brokers

compare the organization of a stock insurer and a mutual insurer

stock holders supply capital need to form a stock insurer or to expand its operations. stockholders expect to recieve a return on their investment in the form of stock dividends increased stock value or both. Mutual insurer is owned by its policy holders. Because traditional mutual insurer isses no common stock is has no stockholders. Stockholders and policy holders have similar voting rights and elect the insurers board of directors

what is the purpose of licensing individual insurance professionals such as producers and claims representatives

the examinations required for licensing along with continuing education requirements, attempt to ensure that insurance professionals have a minimum level of insurance knowledge and meet ethical standards.

Describe the three major criteria that a state insurance commissioner would consider when deciding to approve or disapprove an insurer's request for a rate

the rate is aqequate (it should be sufficent to pay all claims and the expenses related to those claims helping to maintain insurer sovlency) the rate is excessive and would be disapprove an excessive rate (insurers are entitled to a fair return but not excessive or unreasonable profit. whether the rate is unfairly discrimatory (insurers are permitted to adjust rates based on the risk proile of different groups of insureds but these rates must be fair and consistent)

explain why surplus lines insurers are generally exempt from insurance regulation pertaining to policy forms and rates

they are willing to provide coerage for risks that admitted insurers are unable or unwilling to offer. because these insurers increase the availability of insurance they have the freedom to use policy provisions and rates that are appropriate for a particular risk

identify the two major objectives of regulations regarding insurance policy forms

to be clear and readable to the insurance consumers to detect and address any policy provisions that are unfair or unnecessary

compare file-and-use rating laws with use-and-file laws

under file-and-use laws insurers must rate riles with the state insurance department prior to their use but rates can be used immediately without specific approval use-and-file laws are a variation of the file-and-use law in which insurers file rates within a specified period of time after the rates are put to use

What happens when insurance rates become inadequate due to destructive competition

when insurance rate levels become inadequate some insurers may not collect enough money to pay all of their insureds' claims and may become insolvent. other insurers might lose so much profit that they withdraw from the market or stop writing new business. an insurance shortage can then develop and individuals and organizations might be unable to obtain the coverage they need